Saturday, June 28, 2008

McIntire Goes Carlyle

Reading the Spring 2008 edition of CommerceUVA sent me deeper into the rabbit hole. My undergraduate business school magazine highlighted planned course offerings to deal “with the less than straightforward world of alternative investments.”

The piece noted two characteristics of the alternative investment world, populated by private equity, hedge funds and venture capital firms. First, this segment is “one of the most attractive areas of finance” for many Comm School graduates. Second, the article noted “research on alternative investments is scarce.”

Of course a McIntire alum works for The Carlyle Group, the most politically connected private equity underwriter (PEU). Industry heavyweight, Greg Ledford, is a managing director of the infamous PEU. He graduated in the all star UVA class of 1979 that included Katie Couric and Tom Scully. I got my McIntire degree a year later.

While Greg will help the good Comm School professors with case writing and course development, I offer a few suggested studies based on my research on Carlyle the last few years.

Access to liquidity

This study highlights Carlyle affiliate, Vought Aircraft Industries, and its innovative South Carolina joint venture building key frame assemblies for Boeing’s 787 Dreamliner. For failing to deliver on time, Boeing edged out Vought’s interest in the JV. Vought’s CEO cited liquidity problems in ramping up production. Isn’t that Carlyle’s expertise, mobilizing funds? Study how Carlyle covers up this and other blunders while successfully maintaining its good name.

Risk Management

This case involves Carlyle affiliate, LifeCare Holdings, a long term acute care hospital company with 21 sites. Carlyle closed the deal in August 2005. Within weeks Hurricane Katrina slammed the U.S. Gulf Coast. LifeCare of New Orleans lost 24 patients during the storm and in its toxic, sweltering aftermath. Carlyle took a multi-pronged approach to managing this disaster.

First, it kept their good name out of the news articles on the patient deaths. Second, it managed to keep that same good name out of the White House Lessons Learned report on Hurricane Katrina. Despite news footage of President Bush asking FEMA Chief Mike Brown about hospital patients, the facility with the largest patient death toll warranted not one mention in the Bush report. Third, it blamed rogue clinicians for the deaths. When a grand jury failed to indict the physician and nurses, Carlyle’s attorneys offered a truly innovative defense. They say LifeCare patients became wards of the federal government as soon as FEMA evacuation teams set up in New Orleans.

Managing the Media

This becomes a little easier when the private equity firm controls numerous media companies and marshals advertising budgets for over 600 firms. What ad selling media company wants to be banned from that book of business? The case involves the sale of two Carlyle affiliates to Dubai Aerospace, a government controlled investment company in the Middle East.

Over a year prior to the sale of Landmark Aviation and Standard Aero, America erupted in protest over the sale of port operations to Dubai Ports World. Yet, the airport deal involved operations at over 50 U.S. airports. Landmark Aviation has been rumored as a provider of rendition flights which take terror suspects to other countries for detention and interrogation. While the deal included selling off portions of the two companies for national security reasons, the media stayed away from the story.

Shortly after the "no news" airport deal with Dubai, America pulsed again in concern over the sale of the NASDAQ to the Bourse Dubai. Carlyle achieved a virtual media blackout on a hot story, a tribute to their media management skills.

Getting Congress in Their Pocket

Carlyle wrote the strategy for buying political influence. It varies from straight up donations to influential elected officials like Senator Evan Bayh, to hiring ex-high up government insiders (too many to mention), to consulting with government regulators on changes more friendly to PEU’s. In return their affiliates get earmarks, indefinite quantity/indefinite delivery contracts, legislation giving their particular industry favored payment or legal status, and so much more.

This case could go several different ways. If it focused on Senator Bayh, his recent support for sovereign wealth funds ties directly back to his benefactor. Mumbai Development Company, another United Arab Emirates government owned investment company, purchased 7.5% of Carlyle in September 2007. Evan saw no problems with such ownership as long as proper disclosure exists. Carlyle’s most recent effort in the disclosure arena came up short.

It could spotlight Congress in action, say the committee that reviewed Carlyle’s purchase of giant nursing home company, ManorCare. One might expect Carlyle’s past failure to 24 patients during a disaster to come to light during the proceedings, but it did not happen. Congress gave the PEU a Christmas present, allowing the deal to close December 21, 2007. Shortly thereafter, Carlyle created a quality committee to address acquistion concerns.

Another angle would find Carlyle gobbling up the huge government services division of Booz, Allen, & Hamilton. The firm provides consulting and intelligence services to the federal government. As Carlyle aims to provide one stop shopping for the government industrial monstrosity, having their new consulting arm recommend affiliate company solutions seems like a “no brainer.” That includes two of their newer areas of focus, healthcare and infrastructure.


I’m sure Greg has a different perspective on these situations. However, as a McIntire graduate with over twenty years in health care leadership, I offer this information as the University develops its alternative investment curriculum. Hopefully, it's not too straightforward.

Update 1-23-12:  McIntire Professor David Smith produced a research paper comparing private equity's performance in times of distress.   It's a resounding defense of private equity, which McIntire imitated with its obtuse "differential tuition."  That's no price break for struggling youth, but McIntire's semester driven management fee/dividend bleeding of students..