Sunday, April 1, 2012

PEU Lingo Seems Like April Fool's

Private equity underwriters (PEU's) spout obtuse phrases, which require translation for the average citizen. This first offering comes via an ex-business reporter:

Sponsor--  As in KKR is one of the private equity "sponsors" of HCA. I think of a sponsor as a supporting entity, one who provides assistance - especially monetary assistance -- or support to another entity.   I guess the word "parasite" just doesn't sound quite as good.
Sponsors happily trade increased increased interest costs for low tax obligations.  Affiliates pay management fees to the sponsor, which also drives down the tax burden. The Carlyle Group is a virtual nonprofit organization, paying a mere 1-2% in income taxes on economic net income.

Besides being a parasite to the country, PEUs bleed "affiliates" for cash.  This leads us to the next PEU obfuscation:

Liquidity recap--This term replaced "dividend recapitalization," which involves an already leveraged affiliate taking on debt to pay millions in dividends to "sponsors".  
This should be called "debt for dividends," which Congress made tax free for the benefactors (sponsors) until the affiliate debt comes due.

PEU's big payday comes when they flip the affiliate.  "Cash in" is too crude for the PEU crowd, thus they use:

Liquefy -- To sell one's stake in a venture, once known as "monetize."
Various forms of the word liquid are now commonly used by the business media.  Rather than call a firm's failure "bankruptcy," it's called a:

Liquidity event -- When a firm's liabilities exceed its assets and a court procedure is necessary to unwind a firm, aka "bankrupt.".
If more evidence of moral bankruptcy is needed regarding the nomenclature of private equity consider private equity's:

New Ecosystem:-- posed by Carlyle's David Rubenstein in the McKinsey Quarterly.  This ecosystem has big PEU's growing, becoming more diversified, and all going public.  
Since when is financial and political hegemony a new ecosystem?  Rubenstein recently admitted sustainability had to be profitable or his affiliates would not invest.

A trip in the Wayback Machine had Carlyle considering an IPO in 2007. Rubenstein opined:

"Today we are not working on an IPO. But . . . if our competitors all go public and all of them seem to be stronger than they were before, obviously we would have to take a look at the situation."
Strength must not mean rising stock prices, given most PEU's trade below their IPO price.  Carlyle executed several moves to make itself more attractive in 2007.  They failed miserably.  BlueWave Partners -- hedge fund rolled up at a huge loss and Carlyle Capital Corporation (CCC) -- mortgage backed security fund (publicly traded), declared bankruptcy when Carlyle wouldn't meet required capital calls..

Sponsors and affiliates could face liquefaction in a severe enough financial dislocation.  Despite this risk, PEU's are to save America's healthcare system, improve education and rejuvenate public infrastructure? 

Take Carlyle's Rubenstein on health care:

You're going to see more and more of our GDP going into health care, and I think any health-care legislation that passes Congress will just exacerbate the situation. 
PEU's will enrich themselves mightily in each arena, at the expense of taxpayers and the public.

Private equity takes the public for April fools.

Update 4-2-12:  Rubenstein waited until April 2nd to defend PEU's preferred taxation via carried interest.  He failed to mention his trips to Capital Hill to lobby for their continuation.  Meanwhile, SEC filings show the Carlyle Group to be a virtual nonprofit organization, paying a mere 1-2% in income taxes on billions in economic net income.  Rubenstein is laughing all the way, as Reds and Blues are beholden to PEU's.

Update 5-1-12:  Dealbook reported The Milken Global Conference produced new jargon like "instantiate" and "decision latitude."