Tuesday, April 15, 2014

Mystery: Wall Street Suspense Writer Endorses PEU Carlyle


Barron's reported on "The Whodunit Advisor":

When not advising celebrities and others, Marvin McIntryre of Morgan Stanley pens thrillers set in D.C. and on Wall Street. Imagining private eyes, recommending private equity. 

Plenty of ink has been spilled looking back on the credit crisis, but no author has had the perch of Marvin McIntyre, a top Morgan Stanley financial advisor whose office is just blocks away from the White House.

Oddly, The Carlyle Group is also located just blocks from the White House.


In 2011, McIntyre self-published a novel called Insiders, which tracks a sadistic hedge fund manager preying on politicians and CEOs. The story's hero is a financial advisor named Mac McGregor, who tries to balance the safety of his family and the needs of his clients while helping the government pursue the rogue investor.
The Carlyle Group lost their Blue Wave Partners hedge fund and Carlyle Capital Corporation (CCC) before the fall 2008 financial crisis.  Carlyle got back in the hedge fund business in a big way the last two years.

In real life McIntyre plugged Carlyle in the Barron's piece:

McIntyre's distrust of hedge funds extends beyond the fictional realm. He cautions his clients against hedge funds and their inherent need to add risk when returns go south. Instead, McIntyre puts faith in private-equity managers; he has long-running ties to David Rubenstein, the Carlyle Group's co-CEO, and likens private equity to the stock market "with advantages."

As for returns going south Carlyle made over $650 million in capital calls to CalPERS in the 2008 financial crisis.

With 2008 in the rearview mirror, McIntyre isn't letting down his guard, or his writing. In his upcoming third novel—tentatively titled Upside Down—financial perfidies give way to political corruption

Carlyle has other sinister stories, including bribery of a Congressman's wife and losing another Congressman's $20 million investment.  Carlyle affiliate SemGroup imploded from over $3 billion in bad energy bets, while another affiliate suffered 25 patient deaths in Hurricane Katrina and its toxic aftermath.  Carlyle's LifeCare Hospitals and Landmark Aviation have nightmarish stories, which the George W. Bush White House kindly kept hidden.

The book is a page turner, packed with lurid scenes of sex and murder.
Carlyle has a number of lurid stories, Synagro, LifeCare, SemGroup, Brintons, Blue Wave Partners, CCC, and Oriental Trading (complete with toxic jewelry for kids).  Marvin McIntyre is in the business and that requires PEU pandering.  There's plenty to mine at Carlyle, but McIntyre is better off looking the other way.

Monday, April 14, 2014

Brazilian PEU's Seek Lower Taxes


The Carlyle Group's Fernando Borges, currently managing director and co-head of South American private equity, wants lower taxes on investments in Brazil. Borges is also the new head of the Brazilian private equity and venture capital association.  He offered this at the group's annual meeting in Rio de Janiero:

Borges noted that "a more benign fiscal and tax structure for these vehicles would help ensure their survival and, why not, their blossoming as a stronger source of money for new enterprises in Brazil."
Borges echoed Carlyle's familiar "lower tax" refrain, regularly offered by the PEU's high profile co-founders.   Carlyle's co-founders aren't satisfied having their company be a virtual nonprofit.  

Bazillionaires win in our PEU world.

Sunday, April 13, 2014

IRS Goes for Little Guy


WaPo reported:
Across the nation, hundreds of thousands of taxpayers who are expecting refunds this month are instead getting letters informing them that because of a debt they never knew about — often a debt incurred by their parents — the government has confiscated their check.

The Treasury Department has intercepted $1.9 billion in tax refunds already this year — $75 million of that on debts delinquent for more than 10 years.  

The aggressive effort to collect old debts started three years ago — the result of a single sentence tucked into the farm bill lifting the 10-year statute of limitations on old debts to Uncle Sam.

Four years ago private equity underwriters successfully defended their preferred private interest taxation.  PEU's pay virtually no federal income taxes.  The Carlyle Group reported $104.1 million in net income in 2013.  It noted a $2.2 million provision for federal income taxes, a 2.1% income tax rate. 

While Uncle Sam holds average citizens responsible for debts they never incurred PEU boys are taxed like a nonprofit charity and get to park money offshore.  Care to play "Count the Cayman's"?  The game is correctly counting the number of Carlyle Group affiliates in the Cayman Islands (from their 2013 SEC filing).  It may be time to update the challenge.

Update 4-14-14:  The government stopped this practice as of today.

Debt PEUniverse Orbits Back to 2007


Did global efforts to save our financial system in 2008 put the world at more risk five years later?  That's the concern of Bill White, former chief economist of the Bank for International Settlements.  ZeroHedge reported:

"It all looks and feels like 2007. And frankly, I think it’s worse than 2007, because then, it was a problem of the developed economies. But in the past five years, all the emerging economies have imported our ultra-low policy rates and have seen their debt levels rise. The emerging economies have morphed from being a part of the solution to being a part of the problem.

When you talk about crisis resolution, it’s about attacking the fundamental problems that got you into the trouble in the first place. And the fundamental problem we are still facing is excessive debt. Not excessive public debt, mind you, but excessive debt in the private and public sectors. To resolve that, you need restructurings and write-offs."

Excessive private debt has that 2007 feel with the return of covenant lite borrowings.  FT reported:

Dollar-denominated cov-lite loans to US and European companies reached a record $260bn in 2013, or 57 per cent of the total volume, and 69 per cent more than in 2007.

This has prompted the Federal Reserve and the Office of the Comptroller of the Currency to warn that the lack of “meaningful” covenants was a sign that “prudent underwriting practices have deteriorated”.
Forbes added:

Whether covenants afford much protection or not, the pressure from private equity sponsors on financiers to ditch them is building.

US lenders hungry for yield are keen to fund European companies, which means sponsors always have the option to take their deals across the Atlantic to take advantage of low margins and looser terms
Returning to Bill White and his concerns:

The first thing I would worry about are asset prices. Every asset price you could think of is in very odd territory. Equity prices are extremely high if you at valuation measures such as Tobin’s Q or a Shiller-type normalized P/E. Risk-free bond rates are at enormously low levels, spreads are very low, you have all these funny things like covenant-lite loans again.
Private equity underwriters (PEU's), at least those monetizing affiliates, couldn't be happier with extremely high equity valuations and dirt cheap financing.  The question is how much can they cash in before things change.

The strengthening growth might be a mirage. And if it does not materialize, all those elevated prices will be way out of line of fundamentals.
It's one of three scenarios offered by White. 

This is the last of a whole series of bubbles that have been blown.
The bubble may gently decompress or it may burst.   It's our bubble blowing PEUniverse. 

Update 4-13-14:  Ashleigh Rogers of Seeking Alpha sees blue skies ahead for Carlyle.   She finds it a screaming buy.  This will improve her chances of interviewing Carlyle co-founder and chief salesman David Rubenstein.

Friday, April 11, 2014

Condoleeza Rice's Board Seats = Cashbox


Businessweek broke the news that Dropbox appointed Condoleeza Rice to its board of directors.  Rice's consulting firm worked with Dropbox.  The director's chair is not new to Condi.

Kior Inc. reported in a 2013 SEC filing:

Condoleezza Rice, Ph.D., age 58, has been a member of our Board of Directors since August 2011. Dr.Rice is on the board of Makena Capital, a private endowment firm, and C3, an energy software company. She has also served on the boards of directors for Chevron Corporation, Charles Schwab Corporation, Transamerica Corporation, Hewlett-Packard Company and the International Advisory Council of J.P. Morgan.


Kior - Rice's 2013 Director Compensation totaled $196,444.

The company's 2014 10-K stated:
We are a next-generation renewable fuels company, developing a commercial process to produce cellulosic gasoline and diesel from abundant, lignocellulosic biomass. We have substantial doubts about our ability to continue as a going concern.
Kior has nearly $70 million in loans from the Mississippi Development Authority which may come due to performance failures under the agreement.

Makena Capital - "We invest globally across multiple asset classes, including Private Equity, Real Estate, Natural Resources, Absolute Return, Global Public Equity, Tactical/Hedged Equity and Fixed Income, applying a proprietary currency management overlay to optimize risk adjusted returns."

C3 - "C3 Energy offers smart grid analytics SaaS solutions that enable utilities to realize the full promise of their investments in the smart grid." The company was poised to make money off carbon emission tracking and trading.

In addition Rice served as Senior Advisor for the Regions Financial Board of Directors for three years.

Back to Dropbox, Rice's latest board seat.  Earlier this year Dropbox raised capital through a $450 million stock offering.  Allen & Company and Goldman Sachs brokered Dropbox shares to private buyers.  Fidelity is one big shareholder. Others include BlackRock and T. Rowe Price.

Thursday, April 10, 2014

The Kidney Report: SEC Retirement



SEC lawyer Jim Kidney clearly understands "front stage" behavior for public consumption and "back stage" behavior for personal enrichment.  My favorite lines include:

1.  The revolving door is a very serious problem.

I have run into more ego obsessed leaders in the last decade who don't care a lick about anything other than managing their power, influence, compensation and image.  

2.  The only other item I want to be serious about, besides some personal observations in a minute, is the metric of the division of enforcement: number of cases brought. It is a cancer. It should be changed.   ...  I imagine they would welcome coming to an educational event about the Division’s new metric, one which focuses on quality, not quantity. Who could be against it? Goodness knows we spend millions promoting even our emptiest achievements. Why not promote a new metric that will be sensible and helpful.
The language of quality remains but its been co-opted by the aforementioned image obsessed leaders.  They toss out continuous improvement and quality whilst undertaking strategies that ensure the very opposite.  Dr. W. Edwards Deming must be chagrined at how his comprehensive management theories have been jettisoned for the siren song of cheap foreign labor and obscene executive incentive compensation. 

3.  The system is broken. The staff has to work with it. Lighten up on them. They are like refugees from the Crimea. Be kind.
Kidney recognizes what decades of #1 and #2 have fraught on our institutions.  The dual obsession with metrics and image make the workplace a dangerous place to navigate.  I agree we should try to be kind to fellow workers tromping through the toxic management swamp alongside us.

Jim Kidney spoke his heart, his mind and his funny bone.  I appreciate his insights and courage.

PEU Specialization Not New


Forbes reported:

The days when private equity fund managers and investors could make out-sized returns through plain vanilla, debt-fueled buyouts are over. Some of the best opportunities today are in specialist private equity funds that stretch the boundaries of the asset class.
The first area mentioned is litigation finance

A growing number of private equity funds follow niche strategies such as Longford (Capital Management’s litigation finance) and specialization is increasingly seen by wily finance professionals like Longford's Bill Strong (formerly of Morgan Stanley) as the best way to make double-digit annual returns from the activist, long-term investment approach that best defines private equity. “Litigation finance today” is where the buyout industry “was in the early 1980s,” says Strong. “The demand for the capital greatly exceeds the supply.”
Niche strategies in the 1980's provided seed money for The Carlyle Group's startup.  The niche was Alaskan Native tax losses and David Rubenstein the legal specialist.  Fast forward to yesterday when Alaska's largest daily newspaper joined the Rubenstein family (through his wife's ownership).

Niche strategies come and go, with some having cyclical patterns.  That leads to the second area Forbes identified, energy.  Forbes stated:

The oil industry is currently looking to sell more than $300 billion in assets as stock market investors press oil companies for lower capital expenditure and higher dividends after years when free cash was spent developing deep offshore wells and shale projects. Marcel van Poecke, an oil industry entrepreneur with over 25 years of industry experience, hired last year by private equity fund manager Carlyle Group, said at the recent FT Commodities Summit: “I’ve never seen the market with so many good assets for sale. It is the buyers’ market.”

The article should have said "rehired."  Poecke founded and worked for European refiner Petroplus, which became a Carlyle affiliate in 2005.  After making five times their original investment in two years Carlyle jettisoned a debt bloated Petroplus Holdings.  Petroplus carried its heavy debts for five years before imploding, i.e. declaring bankruptcy.

Energy cycles and Carlyle and company are ready to reenter refining in part to lock up supplies for commodity trading.  If Carlyle's staid pipelines can explode from bad energy bets, I expect refineries to be even more volatile