Friday, September 14, 2007

Recipe for 26% Annual Return for Investors

High dollar investors with the Carlyle Group gathered recently in our nation's capital to talk about the difficult investment climate that sprouted virtually overnight. Not long ago the firms chiefs called the environment "frothy". The story mentions CEO Lou Gertsner's admonitions to "take a long view". It also cites Carlyle's history of granting investors 26% annual returns before fees. Below is a recipe for generating such high profits over several decades.

1. Buy strategically placed, undervalued companies. This means buy businesses in areas the government intends to "privatize". Leveraging insider knowledge of such strategic shifts is critical. The practices is aided by the litany of ex-government insiders on Carlyle's payroll, starting with ex-Defense Department Chief Frank Carlucci and ending with the latest hire, Randal Quarles, former undersecretary of domestic finance at the Treasury Department.

2. Use existing political connections to feed off the government tit. Political donations are OK as long as politicians come through for Carlyle. One example is Vought Aircraft Industries which gave generously to Texas legislators (both state and national) and in return got federal and state subsidies.

3. Get more business from the government. By growing revenues dramatically in a two to three year period, Carlyle can flip a company for an easy double. For buying CSX Lines, holding it just over a year and renaming it Horizon Lines, Carlyle doubled their initial investment. While much of their shipping occurred on U.S. monopolized routes courtesy of the Jones Act, something changed to drive the value of the company skyward. How much increased business did Uncle Sam send Carlyle's way during that year?

4. Use political connections to drive special legislation granting tax exemptions. Horizon Lines, a shipping company, benefited mightily from the switch to the tonnage tax which recently turned U.S. flagged shipping into a very profitable but tax free industry.

5. Encourage privatization of government services. One of Carlyle's early investments was USIS, previously an arm of the federal government that did security investigations. The powerful private equity underwriter (PEU) sees the writing on the wall in health care and public/government infrastructure, expanding its investments in both areas.

Turn the burner on high, stir in a ample amounts of campaign donations and voila, 26% returns! Don't try this at home, one must be a professional to do this safely, especially as PEU's produce flammable gases.