Sunday, February 23, 2014

PEU Sustainability

WaPo "Business with Bloomberg" reported:

The Carlyle Group of the District appointed Jackie Roberts chief sustainability officer.

Her first act should be to explore the sustainability of her employer and other private equity underwriters.  How sustainable are they when their impact studies only count their winners?  It takes pathology to exclude affiliates who failed the sustainability test by going bankrupt.   

How sustainable are they when Carlyle made over $650 million in capital calls to CalPERS during the financial crisis?  That doesn't count Carlyle's other owners who kicked in how much cash to keep the PEU afloat?  What if they declined?  How sustainable would've Carlyle been?

Image is everything in our PEU world.  The profitability of corporate flipping is dependent on a number of factors, massive tax breaks/direct government subsidies, leverage and cheap debt, management fees to investors, management/deal fees to affiliates,  bleeding affiliates via dividends/distributions and growing asset prices.

Right now the system is stacked in Carlyle's favor.  For private equity to be sustainable its needs someone to buy their companies.  That will stop at some point.  The question is when.

Consider what Carlyle affiliate Commscope said about sustainability:

“It's easy to think of a few things that definitely shouldn't be sustained, such as traffic jams, head colds and boring lectures.” 

I’d add private equity to the list.