Sunday, April 23, 2017

Trump's Tax Plan: Impact on PEU

PressTV reported:

"Big TAX REFORM AND TAX REDUCTION will be announced next Wednesday," the president announced in a tweet Saturday.

According to David Rubenstein, a co-founder of The Carlyle Group, Trump “will no doubt have some principles that he'll set forth soon and no doubt there'll be corporate tax cuts in those and repatriating money from offshore.”
It will be interesting to see the impact of President Trump's tax plan on private equity underwriters, especially as his administration is peppered with them.

Bloomberg reported in early March:

When it comes to the proposal to replace interest deductibility with immediate expensing -- a move that could meaningfully change the leveraged-buyout calculus -- the final result is likely to be more muted, said Rubenstein, who co-founded Washington-based Carlyle in 1987.
Just days to find out who President Trump serves.  Government by the PEU for the PEU.

Saturday, April 22, 2017

Troubled Carlyle Group Affiliate to Reform Scottish Social Security

The Carlyle Group purchased PA Consulting in December 2015.  The UK's Parliament released a report on an investigation of PA Consulting.  It found:

PA showed a serious lack of due care for its client in a number of ways: it failed to tell UKTI it was procuring the wrong thing; it failed to provide a full and clear explanation of its costs to UKTI when asked; and it described passing extra back-office costs to UKTI as being in UKTI’s interest. PA has told us it accepts it could have been better at communicating and providing explanations to UKTI. However, its inconsistent and unclear submissions and explanations, to us and the National Audit Office as well as to UKTI, seem to us to be more designed to obfuscate and confuse than to provide clarity

PA’s repeatedly inconsistent explanations are indicative of poor record keeping and a lack of corporate understanding of what happened. It beggars belief that this would have got through proper quality assurance and management review processes. We are also concerned that PA’s bonus scheme for its partners risks incentivising poor behaviour in the absence of proper controls. PA has acknowledged that the team negotiating with UKTI did not have the right skills to undertake a commercial negotiation or to make fair representations to UKTI. It has also acknowledged that the issues with the UKTI contract should have been escalated sooner internally. 
UK officials escalated these concerns such that the contract was cancelled in January 2016.  Interestingly, PA's CEO explained why they sold 51% of the firm to Carlyle:

1)  PA is net-asset valued so acquisition and growth by bolt-ons was not easy
2)  PA has a sizeable pension scheme looking after large numbers of folk expecting considerable creature comforts in their retirement. This reduces its agility. The money brought to the table by Carlyle has enabled Middleton to insist that the substantial number of PA shares still owned by former employees are cashed-in, which helps incentivise existing and future staff. 
3)  It gives PA favoured access to Carlyle’s 200 portfolio companies. A virtuous circle of Carlyle using one portfolio member to nurture others. 
4)  For a small, family-like organisation it was high time for some growth especially in the United States where PA has little traction. 
I'll add a fifth.  PA knew it needed more political gravitas and Carlyle provided.  Proof is PA Consulting has a new gig focused on modernizing Social Security for Scotland.  PA Consulting will "work on the development of a new trial Scottish social security system." 

Carlyle has long wanted a piece of social security and individual retirement accounts.

Five years ago, Carlyle Group's David Rubenstein predicted a future where ordinary savers would be able to invest in private equity, an industry limited to wealthy individuals and institutions.
PA wants growth in the US and President Trump recently floated eliminating the tax that funds Social Security.

In a parallel story consulting giant PwC helped the government of India select 75 cashless townships

To qualify as a less-cash townships, the conditions included the township must have completed deployment of a payment acceptance infrastructure, and all the families residing there would have to covered under training programmes. Also, more than 80 per cent of the total number of transactions must have been done through digital modes of payments during the review period.
Social Security and cash may soon be things of the past.   Governments and consultants will have conspired to make this happen.  Rest assured private equity is driving both and has plans to profit every step of the way.

Monday, April 17, 2017

Booz Allen Issues Debt to Pay Sponsor Carlyle

SeekingAlpha reported:

Booz Allen Hamilton Holding Corporation (NYSE:BAH) announced the launch of $350M aggregate principal amount of unsecured senior notes by its wholly-owned subsidiary, Booz Allen Hamilton Inc.
Funds will be used for multiple purposes, including:

"repayment of a portion or all of the outstanding deferred payment obligation established in connection with the acquisition of Booz Allen by The Carlyle Group in 2008."
SEC filings show the deferred payment obligation at $158 million when established on May 15, 2008.  On December 11, 2009 BAH took on debt to repay Carlyle $100.4 million, $78 million of the deferred payment obligation plus $22.4 million in accrued interest.   The current amount owed Carlyle under the DPO is $81.3 million.

Booz paid Carlyle a one time $20 million for investment banking, financial advisory and other services.  It also pays Carlyle $1 million per year in advisory fees.

PEU affiliates have the honor of paying, paying and paying sponsors.  Carlyle loves cash, especially when the PEU notices early seismic economic shutters.

Sunday, April 16, 2017

Trump's Potential PEU Fed Vice Chair

Reuter's reported:

The vacant Federal Reserve vice chairman's seat is a key regulatory role Director of the National Economic Council Gary Cohn and his colleagues on the economic team want to fill soon. Cohn has interviewed nearly two dozen candidates and has whittled the list down. Randal Quarles, a veteran of the George W. Bush administration is one of several candidates left, a source familiar with the process said.
In June 2003 Quarles spoke on Iraqi Reconstruction.   Ten years later an analysis of that effort showed:

Iraq Reconstruction Cost U.S. $60 Billion: Left Behind Corruption And Waste
Despite a $60 billion U.S effort to rebuild Iraq, life for most Iraqis has not improved significantly, according to a bitter and regretful retrospective by Iraqi officials and U.S. diplomats, military officers and politicians.
Randall Quarles left President George W. Bush's U.S. Treasury for The Carlyle Group where he served on their financial services team.  Carlyle made a fortune on BankUnited, which it obtained from the FDIC with billions in subsidies.  That sound strikingly familiar to IndyMac and Steven Mnuchin, Trump's current Treasury chief.

The potential Vice Chair of the Federal Reserve served under President George H. W. Bush.

During the Administration of President George H.W. Bush, Mr. Quarles also served at the Treasury; first as Special Assistant to the Secretary for Banking Legislation from 1991 to 1992 and as Deputy Assistant Secretary for Financial Institutions Policy from 1992 to 1993. In those roles, Mr. Quarles was a principal member of the Treasury's effort to design comprehensive reform of the laws governing bank capital markets activities.
Randall Quarles rotated from government to Carlyle, a politically connected private equity underwriter (PEU).  Bank capital markets imploded after Quarles left his Domestic Finance position with the W. Bush administration.  Carlyle's press release on Quarles hiring stated:

"Before joining Carlyle, Mr. Quarles was Under Secretary of the U.S. Treasury, where he led the Department's activities in financial sector and capital markets policy, including coordination of the President's Working Group on Financial Markets, development of administration policy on hedge funds and derivatives, regulatory reform of Fannie Mae and Freddie Mac, and proposing fundamental reform of the U.S. financial regulatory structure."
That's the junk that blew up in 2008.  Candidate Donald Trump wouldn't touch a guy like Quarles.  Will President Trump appoint another PEU to retain a system that rewards those with the most?

Buyout shops have seized on a performance enhancer that artificially jacks up results, according to many industry executives.The practice isn’t illegal, and is largely cosmetic, but it allows private equity firms to goose what’s known as their internal rate of return, or IRR.
Greed requires those with oversight to look the other way.  Quarles played a role in several government performance debacles.  I expect none of this to come up if he is nominated for Fed Vice Chair.

Update 4-17-16:  WSJ reported Quarles will be top financial regulator for Federal Reserve Bank.

Update 4-20-17:  The Intercept found this story.

Carlyle's Hilcorp Gets Conoco-Phillips Assets at Half Price

WSJ reported:

Conoco-Phillips to Exit San Juan Basin in $3 Billion Deal:  Houston-based company has been selling off assets to pay down debt and shore up its balance sheet.
Houston Business Journal added:

ConocoPhillips is selling the San Juan Basin assets to Hilcorp San Juan LP, a partnership between Houston-based Hilcorp Energy Co. and Washington, D.C.-based private equity firm The Carlyle Group.
The Carlyle Group loves to buy distressed assets and got a huge discount from Conoco-Phillips.  SeekingAlpha noticed:

Book value of the assets amounts to $5.9 billion, while the company received just half that amount. This is highly disappointing as the company actually obtained a 1.2 times book value multiple for the assets, which were recently sold in Canada.   
Private equity's strategy is buy cheap and sell high.  Conoco-Phillips can only do so many buy high-sell cheap deals and survive.  How did Carlyle and Hilcorp get so lucky?

In an odd twist U.S. Energy Secretary Rick Perry called for a study to evaluate "to what extent regulatory burdens, subsidies, and tax policies are responsible for forcing the premature retirement of baseload power plants.”  How many baseload power plants does Carlyle own?  Last summer Carlyle's Cogentrix asked the state of California to subsidize its natural gas power plants.  History shows Governor Rick Perry gave Carlyle Group affiliate Vought Aircraft Aviation $35 million for 3,000 new jobs.  After six years with a Texas sized jackpot, Vought hadn't added to their workforce.  Vought cut 35 Texas jobs as of its target performance date.  Perry bold face lied and called it a 29,377 job gain.  Rick Perry loves to steer public money to his PEU friends and they love getting it.

Update:  In another odd twist Alaska Dispatch News reported on several Hilcorp oil/gas spills in Alaska and Louisiana.   ADN is owned by Alice Rogoff Rubenstein, the wife of Carlyle Group co-founder David Rubenstein.  Those reports occurred before Hilcorp and Carlyle announced the San Juan Basin acquisition from Conoco-Phillips

Saturday, April 15, 2017

Carlyle's Upscale European Retailers

While American retailers slide into bankruptcy The Carlyle Group increased its bet on Italian fashion brand Twin Set--Simona Barbieri.  Carlyle bought the remaining 10% from Barbieri who will leave TwinSet's board and resign from her Creative Designer position.

Twinset is a key investment in the fashion and clothing sector at European level, combined with Golden Goose Deluxe Brand and Hunkemoller, following the (Carlyle's) previous investment in Moncler.--Marco De Benedetti
Payless Shoes serves customers with less disposable income.  Golden Goose serves the top 0.1%.  TwinSet markets its products as "accessible luxury."

As TwinSet's co-founder it would interesting to hear Simona Barbieri's take on private equity practices.  I'm sure she's experienced much since Carlyle bought 72% of the company in 2012, later upping ownership to 90%.  TwinSet took on additional debt to fund a Carlyle dividend in 2014.

It's likely Carlyle purchased her silence in addition to the final 10% stake.

Carlyle's Horbach Shares PEU History

Business Insider reported:

What is now a $2.5 trillion industry managing money on behalf of public pensions and the like started as a hodgepodge of so-called leveraged buyout firms, popularized in the 1980s.

Business Insider recently sat down with Sandra Horbach, the cohead of US buyouts at the $158 billion Carlyle Group, to get a sense of how the industry has changed.
She started with the roots of private equity underwriting (PEU):

When I started in the business back in 1987, there were two firms with $1 billion in capital: KKR and Forstmann Little & Co. 
Bain Capital started in 1984, Oak Hill in 1986 and Carlyle in 1987.  The 90's brought Apollo, TPG, Silver Lake and Cerberus.

Thirty years later, there are thousands of firms with billions in capital. So we've grown significantly as an industry in a very short period of time.

 When I joined Forstmann Little in 1987, right out of business school, it wasn't even an industry. We didn't call it private equity — it was leveraged buyouts. It was all about the love of finding great companies to work with and invest and help build. It wasn't about creating this mega industry that has since been created.
And that period overlaps with the rapid rise of income for the wealthy and income stagnation or decline for the average citizen.  Her love of finding companies to help build doesn't quite fit with
her confession (which goes against the PEU party line).

When I started in the business, there were a handful of small firms, five, 10 individuals basically looking for great opportunities to invest. Very little amounts of equity, a lot of leverage. And a lot of returns were created through financial engineering. The returns that you could realize back then were significant. You could realize five times, 10 times your money because you were putting smaller amounts of equity into the entire capital structure. 
Horbach confessed her love to "help build" was actually "financial engineering."  She knows high leverage places a company at significant risk for default should conditions change.  What was not mentioned in the BI interview?  The widespread practice of affiliates issuing debt to pay the PEU sponsor a massive dividend.

Horbach shared her "mistake", the implosion of Oriental Trading Company on Carlyle's watch. 

Horbach: "... two years into the investment we hit the great recession, and, simultaneously, the US postal office increased postage rates for catalogs"

BI:  Those two factors seem a bit unpredictable. One the crisis, two the post office.

Horbach: You're right. They were incredibly unpredictable.
Horse hockey to both BI and Horbach.  Carlyle's highly leveraged mortgage backed securities vehicle Carlyle Capital Corporation (CCC) entered bankruptcy in spectacular fashion in March 2008, a full six months before Lehman's failure.  I believe August 2007 occurred before September 2008.

... an email sent by (Carlyle co-founder William) Conway to CCC chief executive John Stromber on August 14, 2007—a month after CCC had gone public and as the mortgage bond market continued to spiral further out of control.

“Maybe,” Conway wrote, “panic is appropriate.”
Carlyle distanced itself from CCC after it imploded.  

As for Horbach's "unpredictable" assertion Carlyle knew things were going to hell when it asked part owner CalPERS for $681.3 million in capital calls in 2008. Who doesn't love a history rewrite?

Some historians would quibble and say the (LBO-PEU) industry's origins date back much further, though not in any stance like today. 
Private equity's tradition of out-sized rewards for the top go far back.  The Pharaoh ordered Jewish slaves to make the same number of bricks as before, but they had to gather their own straw.  (Exodus 5:7-8)  

Idealistic founding father Thomas Jefferson turned PEU in his later years. Smithsonian's article "Master of Monticello" stated this about Jefferson:

It had long been accepted that slaves could be seized for debt, but Jefferson turned this around when he used slaves as collateral for a very large loan taken out in 1796 from a Dutch banking house in order to rebuild Monticello.  He pioneered the monetizing of slaves, just as he pioneered the industrialization and diversification of slavery.
Thomas Jefferson levered slaves, which makes him a PEU forefather.  Greed is as old as human selfishness and insecurity.  Private equity is the master.  Returns and image are all that matter.

Thursday, April 13, 2017

United CEO's Three Steps to Apology

United's CEO Oscar Munoz blamed a "disruptive and belligerent" passenger for his on-board beating after stressing the passenger had to be re-accommodated.  That Munoz communication failed to mention the passenger's re-accommodation to a hospital bed and the man's need for reconstructive surgery.  Munoz eventually worked his way to an apology and accepting responsibility.

United hired CEO Oscar Munoz in September 2015.  He took a medical leave of absence from October 19, 2015 until March 14, 2016.  For six weeks of work in 2015 Munoz earned $5.8 million.

The United CEO's 2016 pay should be made public the end of April in a SEC filing.  That's also when an operational review will be completed.

Mr Munoz promised employees a review of airline policy on overbooked flights, and an examination of how they work with city and airport authorities. The results should be available by April 30.
Change is in the air for United.  Dr. Dao won't fly anytime soon.  Injustice lasts until justice is served.  It can come from the top but that requires reflection, insight and balance, rare characteristics in our hallowed halls of power.

Munoz needs to promise customers they won't be manhandled on-board after getting felt up by TSA agents via stepped up pat downs.  Anger lives against the abuse of power, corporate, police and political.  United's customer beating just added to it.

Aside:  Munoz was CEO of CSX Corporation prior to joining United.  He went from "throwing bums off trains to tossing physicians off planes."  That's a step up.

Update 4-16-17:  United "will no longer allow employees to take the place of civilian passengers who have already boarded overbooked flights."  Translation:  United will no longer instruct employees to forcibly evict seated passengers to make room for other employees/contractors.

Saturday, April 8, 2017

Greed at Top Leads to Inequality

Vice reported:
A wave of new research shows how as corporations get bigger, the share of money out there going to actual workers declines. 

There's been roughly a 10 percent decline in what's known as "labor share" over the past 30 years. (Barkai's paper looked at the non-financial corporate sector, which encompasses roughly 80 million workers.) What this means is that out of the total number of goods and services produced by corporations, less of it by percentage terms (10 percent less) is going to pay for salaries and benefits—a.k.a. income.
Consummate insider Larry Summers offered the monopoly answer to rising inequality.

“Only the monopoly-power story can convincingly account” for high business profits and low corporate investment. 
Private equity underwriters (PEU) can account for high business profits and low corporate investment.  Private equity underwriters prioritize interest, dividends and management/deal fees over capital and human resource investments.  Money is frequently spent on interest expenses several orders higher than pre-buyout levels.  Once cash begins to build corporate capital is spun off to PEU sponsors as dividends or special distributions.  

Vice cited research that supports this practice.  Researchers found

"spending on capital inputs, which includes robots, is declining even faster than spending on labor. As Barkai put it, "Measured in percentage terms, the decline in the capital share (30 percent) is much more dramatic than the decline in the labor share (10 percent)." 
Private equity exploded the last thirty years.

Ten years ago HBR lauded private equity as a model for public companies to follow.  That meant focusing on profits and optimizing capital strategies, both to the detriment of worker pay and benefits.

Private equity became ubiquitous in our economy with its rapid growth in assets under management (AUM) from 2000-2015.

PEUs bought companies at over the twice the rate they sold them the last five years.

Sometimes PEU affiliates have the misfortune of being sold to another private equity underwriter.

Might things turn for the little people?  Not likely.  Billionaire President Donald Trump and his Wall Street/PEU administration offer little hope.   Private equity's preferred taxation via carried interest continues a decade after it was raised as unfair.

Might benevolent corporate chiefs send a little more employees way?  Not if it reduces their executive incentive compensation.

What if the rare CEO wants to put workers interest above their own?  They might have a PEU owned benefits consultant to get through.

Private equity firm Blackstone Group LP (BX.N) has agreed to acquire insurance broker Aon Plc's (AON.N) employee benefits outsourcing business for around $4.8 billion.
Blackstone's Stephen Schwarzman is a Trump friend and advisor.  Greed is the water in which business and political leaders swim.  Doing things at the expense of workers won't likely change anytime soon.

Update 4-15-17:   Carlyle's Sandra Horbach described how our world became PEU.

Thursday, April 6, 2017

PEU Retail Implosions

Bloomberg reported:

Rue21 Inc., a teen clothing chain backed by private equity firm Apax Partners, is preparing to file for bankruptcy, according to people familiar with the matter.

A filing could come as soon as this month, said the people, who asked not to be identified because the process isn’t public. As it negotiates with lenders, the company has a forbearance agreement in place that lasts through late April.

The filing would continue a tumultuous year for U.S. retail, with numerous chains seeking bankruptcy protection and others closing huge swaths of stores. Payless Inc., the discount shoe seller, filed for Chapter 11 earlier this week.
Payless is owned by two private equity underwriters (PEU), Blum Capital Partners and Golden Gate CapitalReuters reported:

The stress facing the shoe seller is reflected in the trading price of its debt, which is far below face value. Its $520 million senior loan is being quoted at about 52 cents on the dollar, and its $145 million junior loan is being quoted at about 16 cents on the dollar, according to sources.

Some of that debt was used to pay a dividend to the company's equity owners, Blum Capital and Golden Gate. 

Other iconic chains, including apparel label J. Crew Group Inc and accessories chain Claire's Stores Inc, have started to look for ways to address their debt loads as their sales shrink.
PEHub reported J. Crew's similar situation:

U.S. apparel retailer J. Crew Group Inc is taking steps to negotiate with its creditors about cutting the value of its approximately $2 billion debt load, as its struggles with falling sales, people familiar with the matter said on Friday.

A debt restructuring would underscore the challenges the company has faced since it was acquired by private equity firms TPG Capital LP and Leonard Green and Partners LP in a $3 billion leveraged buyout in 2011. 
As for Claire's Stores Bloomberg offered:

Apollo Global Management is reaching back into its playbook. 

The private equity investor has been buying up bonds of Claire's Stores, the jewelry chain it acquired in 2007, Bloomberg News reported late Tuesday. It's a move that lets Apollo better control the company's fate, which has been bleak since the firm's buyout saddled it with more than $2.3 billion of debt. 
Buying affiliate debt on the cheap is a backdoor way to equity ownership post bankruptcy.  The Carlyle Group undertook this very strategy with Brinton's and Mrs. Fields.

Turn over a struggling retailer today and one finds a PEU.  Dividend milking by sponsors deteriorates the company's balance sheet.  This enables the PEU to buy back debt on the cheap and have hope of a future equity position for the company they managed into bankruptcy.    

Update 4-11-17:  Add Bain Capital's Gymboree to the list. 

Update 4-14-17:  Add  Neiman Marcus and PEU owners Ares Management and the Canada Pension Plan Investment Board to the list

Wednesday, April 5, 2017

Two Pre-Crisis Deals Near Critical Refinancing

Two 2007 multi-billion deals face the prospect of refinancing.  Kushner Co. purchased 666 Fifth Avenue for $1.8 billion in January 2007 and needs to refinance an interest only loan for $1.2 billion.  The Carlyle Group bought Sequa Corp in December 2007 for $2.7 billion and faces $1.35 billion in debt due June 2017.

Both Carlyle and Kushner have prestigious political connections.  Carlyle located in Washington, D.C. for that very reason.  The Kushner's have connections to current President Donald Trump. 

If these folks can't get their billion dollar loans refinanced then the next financial crisis may be looming.  Crisis arise when the big money boys no longer trust one another to make good on their bets, I mean debts.

Carlyle prepared to keep at least a small equity stake if Sequa folds.  Forbes reported:

(Carlyle) scooped up $235 million in face amount of Sequa’s $350 million in unsecured bonds, buying them at cents on the dollar in the open market throughout 2015.  
Oddly, Carlyle helped rescue 666 Fifth Avenue in 2008.  It flipped its stake in 2012.  We'll see if banks and other big money boys trust Kushner and Carlyle to make good on their debts.  If yes, they'll get financing.  If no, these could be like Carlyle Capital Corporation, the canary in the Fall 2008 financial crisis. 

Thursday, March 30, 2017

Corporate Cash to Enrich Executives

Corporate executives learned financial engineering from the greed and leverage boys.  Companies plan to use $2.5 trillion in cash for strategies that boost their pay.  Those strategies include cash for share buybacks, dividends and buyouts.  Capital expenditures and research/development have decreased as executives sent a greater percentage of corporate cash toward financial engineering.

Employees know how little of this cash trickles down in the way of wage and benefit increases.  The sad thing is employees helped generate the $2.5 trillion cash mountain.  Executives sometimes offer words of gratitude but those ring hollow.

We are not all in this together.  The top are in it for themselves.  Cash use is a reflection of such management greed.  At least 60% suggests it.

Tuesday, March 28, 2017

Rubenstein to Hold Up PEU Lantern

North End reported Carlyle Group co-founder David Rubenstein will keynote an event commemorating the kickoff of the Revolutionary War:

On April 18, 1775, two lanterns were hung from the steeple of the Old North Church, launching what would become the American Revolutionary War. Signaling the departure of British regulars “by sea,” the two lanterns have come to represent the resolve and ingenuity of the American spirit.

Every year, Old North commemorates the hanging of the lanterns with an evening of history and an inspiring address from the year's keynote speaker, David Rubenstein, co-founder and co-CEO of Carlyle Group.

Join us Sunday, April 16 2017 at Old North Church to celebrate this day.
Some may find it odd for a private equity underwriter (PEU) to speak given greed's role in decimating the resolve of American workers and the size of America's middle class.  PEU ingenuity via financial machinations informs workers that rewards go to owners and managers.  They do not trickle down.

The corporate ruling class can help sponsor the event.

For sponsors, a reception in the Washington Garden and Courtyard will begin at 6:30 p.m. and the Lantern Ceremony will start at 8:00 p.m.

Steeple Climber - $25,000 (10 guests/2 pews/$24,150 is tax deductible)
Lantern Lighter - $10,000 (8 guests/2 pews/$9,320 is tax deductible)
Bell Ringer - $5,000 (5 guests/ 1 pew/ $4,575 is tax deductible)
Pew Owner - $2,500 (4 guests/ 1 pew/$2,160 is tax deductible)
It took time but I found Rubenstein has more in common with aged revolutionaries than those waging war against the crown.  Both David Rubenstein and Thomas Jefferson displayed youthful idealism, which waned as money rose in importance.   

The Smithsonian reported Thomas Jefferson's turn to the dark side:

It had long been accepted that slaves could be seized for debt, but Jefferson turned this around when he used slaves as collateral for a very large loan taken out in 1796 from a Dutch banking house in order to rebuild Monticello.  He pioneered the monetizing of slaves, just as he pioneered the industrialization and diversification of slavery. 
Rubenstein pioneered the marriage of political and business connections, the long term use of preferred PEU taxation via carried interest, financial machinations that suck cash out of affiliates while enriching the PEU sponsor and much more.

The Lantern Ceremony with David Rubenstein sheds light on the shift from our country's founding ideals to a shadow side with its staggering emphasis on power and greed.

Monday, March 27, 2017

Rubenstein Funds PEU Oriented Brookings

The Chronicle of Philanthropy reported Carlyle Group co-founder and patriotic philanthropist donated $20 million to Washington think tank The Brookings Institution. 

Brookings Institution
The Washington billionaire David Rubenstein pledged $20 million, in part to establish the David M. Rubenstein Fellowships, a program for early and midcareer scholars and other experts. Fellows will be appointed for two years to conduct research and analysis and generate policy ideas and recommendations on key governance challenges of the 21st century. The first class will be in place by September. The money will also support the institution's Foreign Policy Research program. The $20 million will be paid over six years. Mr. Rubenstein is a co-founder of the Carlyle Group, a private-equity firm, and a co-chair of the Brookings Board of Trustees.
Brookings' board is populated by private equity supporters from America's Red and Blue political parties.  Some names are in PEU Report archives.

Don't expect Brookings to offer anything other than continued benefits to the greed/leverage boys.  Universities and think tanks have been co-opted by Larry Summers' desire to profit handsomely and be heard.

Rubenstein's $20 million donation shouts in Rockerfeller fashion and will echo throughout D.C.'s swamps for decades.

Sunday, March 26, 2017

Carlyle's Bounty Looms in New York

Bloomberg reported:

Carlyle Group LP is weighing an initial public offering of vitamin and supplement firm Nature’s Bounty Co. alongside its ongoing sale process, people with knowledge of the matter said.

Nature’s Bounty is expected to have an enterprise value of about $6 billion in a sale or IPO, the people said.
Carlyle purchased the company for $3.8 billion.  Dealbook reported in February:

New borrowing helped fund dividends totaling almost $1.2 billion, allowing the buyout firm to recoup three-quarters of its investment in three years.
In addition Carlyle mined the company for nearly $90 million in management and consulting fees from 2013-2015.  Did Nature's Bounty employees get value from above?

Bloomberg offered the latest employment statistic of 11,000 workers.  That's 3,400 jobs lost, a 24% decline in employment for the company under Carlyle Group sponsorship.

The Orange County Register reported new job cuts for Nature's Bounty employees in California:

Some 223 people will lose their jobs at The Nature’s Bounty Co. facilities in Garden Grove and Santa Fe Springs as the company shifts operations elsewhere in the country, including New York, where it will get $35 million in state tax incentives.
Employees lamented changes since Carlyle purchased the company in 2010.

Carlyle Group has destroyed in 6+ years what two great men spent a lifetime building and that was once... a respectable company. It's not what you know anymore , it's how low you're willing to go with losing your self respect and continuing with the awful direction the company has been nose diving towards.
New York state ignored Nature's Bounty employment history in giving $35 million in economic development incentives:

To encourage The Nature’s Bounty Co. to expand on Long Island, Empire State Development offered the company a grant of up to $25 million, as well as up to $8.5 million in performance-based tax credits through the Excelsior Jobs Program and $1.5 million in tax credits through the Employee Training Incentive program. Over the next year, the company will create 157 new jobs and retain 2,042 jobs, while investing over $142 million to modernize and expand its Long Island operations and consolidate China and California operations into its Long Island facilities.
Texas gave Carlyle's Vought Aircraft Aviation $35 million in 2004 for 3,000 new jobs which never arrived.  That deal involved relocating production from Nashville, TN and Stuart, FL.  Texas taxpayers had $35 million of their hard earned money turn into a non-debt, non-equity capital injection for five years.  Carlyle refunded a mere $900,000 to the State of Texas before selling Vought.

Nature's Bounty may perform better than Vought but this deal bears watching.  Public funds are being used for:

major expansion and modernization of its corporate headquarters and manufacturing operations.
Corporate headquarters will get an upgrade and manufacturing will become automated.  That's how Carlyle can close production sites in California (223 jobs) and Zhongshan, China (105 employees) and add only 157 new jobs.  The drop from a combined 328 jobs to 157 is a 52% reduction. 

It's not clear what Carlyle plans to do with Nature's Bounty facilities. in China.

China. -- As of September 30, 2013, our subsidiary, Ultimate Biopharma (Zhongshan) Corporation ("Ultimate") owned in Zhongshan, China: a 50,000 square foot facility for manufacturing softgel capsules and for administrative offices, a recently built 75,000 square foot warehouse facility with packaging capabilities and 18.5 acres of vacant land adjacent to the manufacturing facility. In addition, Ultimate leased 11,300 square feet of dormitory space and 4,800 square feet of warehouse space in Zhongshan City. Also, one of our subsidiaries leased 84,800 square feet of warehouse space in Beijing. 
Note:  Nature's Bounty had no manufacturing facilities in China in its final 10-K filing before Carlyle's 2010 buyout.  
Overall Carlyle cut Nature's Bounty employment, set up manufacturing in China, and plans to shift it back to New York for $35 million in economic development funding.  How much political hay will Carlyle get from the Trump White House for re-importing jobs it once exported?

Carlyle wants a big return on Nature's Bounty and the people of New York get to help. 

Update 3-30-17:   New York state is generous in giving money to companies that have been fined for harming workers. 

Saturday, March 25, 2017

Carlyle's Assala Energy to Takeover Shell Gabon

Bloomberg reported:

Royal Dutch Shell Plc has agreed to sell its onshore oil assets in Gabon to a unit of Carlyle Group LP for $587 million.  Carlyle will buy all of Shell’s onshore oil and gas operations and related infrastructure in Gabon.

Carlyle’s unit Assala Energy Holdings Ltd. will also take on $285 million of debt from Shell’s Gabon unit and will make an additional payment of as much as $150 million depending on production performance and commodity prices
Assala Energy will be funded by Carlyle International Energy Partners, a $2.5 billion fund, and Carlyle Sub-Saharan Africa Fund, which has $698 million under management.
Assala Energy's website states:

"Our purpose is to provide positive returns on investment to our shareholders (two Carlyle Group funds) and our host countries"
Africa is renowned for corruption and bribery.  Carlyle has a history of hiring government insiders and using political power.  A number of Carlyle affiliates crossed the legal line, ARINC--procurement violations, Synagro--bribery and Carlyle itself-NY pension fund pay to play settlement.

The Securities and Exchange Commission investigated Carlyle's Cobalt Energy for its oil dealings in Angola.   Carlyle's ordeal ended last month.  FT reported:

US prosecutors have dropped their corruption investigation into Cobalt International Energy five years after the Houston-based oil explorer’s local partner in an Angolan deal was revealed to have been secretly owned by top officials from the African nation.
Houston Business Journal stated:

The U.S. Department of Justice recently closed an investigation into Houston-based Cobalt International Energy Inc. (NYSE: CIE), the company and its law firm, Houston-based Baker Botts LLP, announced Feb. 9.

The DOJ was conducting a Foreign Corrupt Practices Act investigation into Cobalt’s operations in Angola. 
Carlyle took Cobalt public so concerned shareholders also had the opportunity to take action.

Back to Gabon, a fellow OPEC country with Angola.  Gabon is north of Angola and both sit on the West Coast of Africa.

Gabon had a hotly contested Presidential election last year/  The Guardian reported:

The Bongo family will extend its 50-year rule over Gabon after the country’s constitutional court ruled Ali Bongo was the rightful winner of last month’s contested election.

The court said it had retallied all the votes from the poll, though it could not do a full recount because all the votes were burned immediately after they were counted at the polling stations. 

Each night since the election, the internet has been shut down, something the communications minister put down to mere “disruptions” in the network. Twitter, Facebook and WhatsApp have also been blocked.
This is the stable political environment that enables Carlyle to make grand returns on Gabon oil. The election aftermath includes:

With another seven years of Bongo family rule secured, progress on reducing Gabon’s income inequality is unlikely.
Time may show how Carlyle's profiteering aids government officials.  Then again, it may not.

Wednesday, March 22, 2017

Palantir Founder and Funder Thiel Ready for New Zealand

Founders Fund and Clarium Capital Management's Peter Thiel made billions from Palantir, a company named after a seeing rock. Not long ago Palantir's value was trumpeted at $20 billion.

The company gets an estimated 40 percent of its revenue from government sources who include the FBI, the CIA, the Defense Intelligence Agency, the Securities and Exchange Commission, Immigration and Customs Enforcement and the military’s Special Operations Command. 
Thiel used his partially publicly funded riches to buy New Zealand citizenship.

The billionaire investor and vocal Trump supporter was able to secure New Zealand citizenship after "categorically" declaring that he has "found no other country that aligns more with my view of the future than New Zealand." 

That was in 2011, the year he was granted citizenship by the New Zealand government even though he did not fulfill the residency requirement and had no immediate plans to live in the South Pacific island nation.
New Zealand served as the movie set for the home of the Lord of the Rings trilogy.

PEU news from January revealed:

Peter Thiel’s Mithril Capital Management has stormed to an $850m final close for its latest fund, it has emerged.

Mithril, named after the silver material stronger than steel mined by dwarves in the Lord of the Rings trilogy, targets businesses which “use technology to solve intractable problems, often in traditional sectors long overdue for innovation."
Note that technology is not being used to reduce decades of growing income disparity or attack the greed of Peter Thiel's PEU peers.   Health care is not the least bit more affordable due to technology.  I'd love to have my health insurance coverage and cost from 2011, the year Thiel became a New Zealander.

Back to Peter.  After making billions from defense contracts Thiel has a man inside the Pentagon to steer business to Palantir and warn when he should flee to New Zealand:

Palanatir Technology’s Justin Mikolay, formerly a chief in-house lobbyist for the company who worked to win over billions of dollars in Army contracts, was quietly appointed to serve as a special assistant in the Office of the Secretary of Defense.
Should Thiel need to move to avoid populism New Zealand awaits.  Until then Thiel has a prime section in the Trump Swamp.

Thursday, March 16, 2017

Greed at Top Unabated

Greed is an economic fractal, a pattern that repeats at varying levels of perspective.  MarketWatch reported on the long term growth in Wall Street bonuses.

Since 1985, Wall Street bonuses have soared 890%, seven times the rise in the federal minimum wage.
MIT Economist Peter Temin captured America's middle class decline:

...the incomes of goods-producing workers have been flat since the mid-1970s.

“We have a fractured society,” says Temin. “The middle class is vanishing.”
Oddly, President George W. Bush's administration lectured the world that democracy required a rising middle class.  His years in office were marked by the rise of private equity underwriters (PEU), whose business model sent middle class jobs overseas and prioritized PEU fees/profits.  The Bush years saw much greed induced financial behavior.  That recklessness carried few consequences after the crisis hit.

W. recently resurfaced as a "folksy wise man," which is only appropriate in that he had no role in the proliferation of greed the last eight years.  Bush does bear responsibility for the growing plight of the middle class during his two terms in office.

I have seen so many people -- particularly those in their 50s - 70s -- taken apart by what has happened in their industry as greed has hollowed out the economy. These are people took pride in their jobs and held themselves to this invisible standard that we all just took for granted, but is being wiped out.
President Donald Trump refilled the D.C. Swamp with the PEU/Wall Street bonus class.  They will take care of their own.  As for the rest of us?  Sorry.  They've trained us for three or four decades to accept our lot. 

Sunday, March 12, 2017

Blackstone City Backed by Fannie Mae

What if the federal government started a new town with 48,431 private equity owned homes.  Uncle Sam would back the rent on 46,010 homes if times got tough.  The private equity firm would be at risk for the rent on 2,421 homes.  That's the case with Blackstone's Invitation Homes, only the homes are spread across the country. 

Invitation Homes, the 2012 buy-to-rent creature of private-equity firm Blackstone, and now owner of 48,431 single-family homes, thus the largest landlord of single-family homes in the US, accomplished another feat: it obtained government guarantees for $1 billion in rental-home mortgage backed securities.

The government agency that has agreed to guarantee the “timely payment of principal and interest” of these “Guaranteed Certificates,” as they’re called, is Fannie Mae, one of the government-sponsored entities (GSE) that has been bailed out and taken over by the government during the Financial Crisis.

This is the first time ever that a government-sponsored enterprise has guaranteed single-family rental-home mortgage-backed securities, issued by a huge corporate landlord.
This is one Obama administration act that President Donald Trump won't undo or fire.  Blacktown, a distributed modern Pottersville, lives thanks to our federal government's actions via Fannie Mae.  It's not the first time Fannie Mae looked after the monied vs. the people they are charged with helping, potential low income home buyers. 

Fannie Mae committed accounting fraud from 1998-2004.

by shaping "the company's books, not in response to accepted accounting rules but in a way that made it appear that the company had reached earnings targets, thus triggering the maximum possible payout for executives."
Fannie Mae settled without admitting or denying guilt.  Fannie Mae's board at the time the fraud started included Ken Duberstein, Stephen Friedman, Jamie Gorelick and James A. Johnson.  Politicians Red and Blue love PEU. 

Americans have the current Fannie Mae board to thank for fostering PEU home buying so they can rent worry free to struggling citizens.  Board member Hugh Frater knows why Blackstone needs Fannie Mae's backing.  Bloomberg shows Frater receiving $162,339 in Fannie Mae board compensation.

Hugh Frater helped found Blackrock and its commercial real estate arm Anthracite Capital.  When Frater's Antracite Capital got into financial trouble in early 2009 he jumped from the board of directors.  Frater had another two years left in his board term when he exited Antracite.  At the time Forbes stated:

Anthracite invests in high-yield (read: junk) bonds and loans that finance commercial real estate. The company on Wednesday announced a mammoth fourth-quarter loss, financial problems ranging from busted loan covenants to unpaid margin calls, and a warning by its auditors that it might not be long for the world. 
Frater later went on to mortgage servicing giant Berkadia.  A story on Frater's leadership noted Berkadia's significant status with Fannie Mae.

Last August, the Mortgage Bankers Association ranked Berkadia among the industry leaders in a wide range of primary and master servicing categories: third in overall loan portfolio ($184.2 billion), third in Fannie Mae and Freddie Mac loans ($27 billion)...
One Fannie Mae board member had seen a company he founded implode from evaporating rents and declining commercial real estate asset valuations.  Fannie Mae will prevent the same thing happening in the residential home rental market.

Hugh Frater also sits on Spearhead Capital's board.  Their website describes Spearhead as "a boutique financial services firm exclusively focused on providing customized solutions for ultra high net worth investors, family offices, and asset management firms."  What if they could steer their clients to tax free, risk free returns?   

It appears another public service organization has been co-opted for the landed gentry.  

Saturday, March 11, 2017

Oil Exports to Rise with U.S. Production Increases

ZeroHedge reported:

Rising production in the Permian, coupled with cheap pipeline and railway transport fees to the Gulf of Mexico, will enable the U.S. to significantly raise its already record-high crude oil exports, Mike Loya, head of the Americas business at oil trading giant Vitol Group, told Bloomberg in an interview published on Friday.

We will see a lot more growth in U.S. crude exports,” said the manager of Vitol, the company that handled the first U.S. cargo after restrictions on oil exports were lifted at the end of 2015.

According to Loya, the Permian crude production would increase by between 600,000 bpd and 700,000 bpd by the end of this year, and “a lot of that is going to be exported”.

Should exports keep their pace, they could help alleviate some of the record-breaking inventories piled up in the U.S. 
Vitol is a joint venture partner with The Carlyle Group in Europe, where Vitol's CEO sees U.S. oil export expansion.  It also has a joint venture with PEU Helios Investment Partners in Africa.  Carlyle lost nearly $400 million on a North African oil deal.  I'll venture Carlyle Capital Corporation investors understand how an investment can disappear in a stressed financial market.

What's fueling exports of WTI?  The price spread between WTI and Brent crude.  When U.S. production could not be exported the spread reached $28 a barrel.   Carlyle's east coast refinery Philadelphia Energy Solutions entered dark times when the spread narrowed.  Carlyle can refine oil domestically or in Europe until they decide to monetize the lot.

U.S. record breaking inventories look to go overseas instead of dropping prices at home.  It's the PEU way.

Wednesday, March 8, 2017

PE Buying Companies: Inflation on Horizon

Bloomberg reported:

What do private equity firms and Oliver Twist have in common? They're generally always hungry for more....  there's Carlyle Group LP, which is attempting to raise $100 billion in four years.

These eye-popping figures come as the industry's dry powder -- the amount raised by firms that isn't yet invested --  hits new highs ($820 billion as of Dec. 31, according to Preqin).
That means more money chasing potential private equity affiliates.

“When you have a lot more money than you did before, generally you bid prices up a little more than you would if you did not have competition,” Mr. Rubenstein told Handelsblatt. “And higher prices probably produce lower rates of return.”
Bingo.  Higher prices lead to higher multiples of earnings which leads to lower PEU returns.

Update 3-13-17:  It appears some want to use new PEU money to buy old investments by the same PEU.