Wednesday, February 28, 2024

Future is Past


The future is the past, at least that's the hope for FTX's Sam Bankman-Fried (SBF).  CNBC reported:

Lawyers for Sam Bankman-Fried are asking a judge for a relatively short sentence like “junk bond king” Michael Milken instead of the 100 years that a presentence investigation report calls for.

Milken kept most of his ill-gotten gains and spent two years in prison out of a ten year sentence.  In 2020 President Donald Trump expunged Milken's record via a grant of clemency.

Michael Milken was a founding father of leveraged buyouts.  Leveraged buyout organizations morphed in private equity underwriters (PEU).  The Milken Global Institute Annual Conference is a gathering of the influential, many are PEUs.  Some call his gathering "the California Davos."

"Like Mike" is the mantra of SBF's lawyers.

“Milken was released from custody at an age when he was young enough to still make a positive impact,” the lawyers argued. “And he became a tremendous force for good in the world.” 

“Milken’s two-year sentence gave him a second chance. He has changed the lives of countless others for the better with that chance,” the filing said. 

 “Given the same chance, Sam would dedicate his post-prison life to charitable works, finding the best ways to help others, and put them into practice, consistent with his commitment to effective altruism.”

WSJ recently wrote a piece on Milken.  It starts with "Michael Milken wants to live forever."  Is it ever enough for these guys?

SBF's parents want their son not to die in jail.  His lawyers are doing their part:

Defense lawyers in their sentencing submission said that the loss calculation is unsupported by evidence, arguing that “the most reasonable estimate of loss is zero.”
Zero losses don't send a series of interconnected companies into bankruptcy.  The ring fenced assets can appreciate.  Bitcoin traded below $30,000 when SBF went to jail.  It's now over $60,000.

SBF was the face of crypto regulation on Capital Hill.  How might the approval of Bitcoin ETFs by the SEC help SBF's case?  

My wise friend wrote about Bitcoin and the PEU milieu's crypto fandom:

This contrived ecosystem is the power grab of the century, similar to the way trade routes around the world created the East India Companies and their brethren. Think of Bitcoin as the rails for money/investments/tokens/influence into every country of the world for the investment platforms of the oligarchs. Numbers only go up with the fiscal pulse and monetization of everything. It seems insane but it keeps pushing forward and nothing seems to get in the way. At the end maybe they nationalize all the REITs and private equity firms like they did with the East Indian Companies and give the insiders big dividends into perpetuity.
The East Indian Companies undertook PEU like strategies, asset stripping, levered debt, indifference to common people, an obsession with increased profits and the use of government connections and funding to achieve their global aims.

This wise friend wrote about Milken and his ilk:

Perfidious acts deserve pEutrid returns unless you can institutionalize darkness in a portfolio. Thank you Mike Milken and gang. 

The PEU Boys mastered the art of issuing discounted notes where the accretion goes to them in fees and other splits while the partner gets a warrant in the event of spectacular return. Along the way there were overlays: leverage, structured products, permission of conflict of interest, dilution of fiduciary rules, revolving door, accounting rule changes, plus others too long to list. 

I always thought this would end but it keeps getting worse. The Crypto/ AI mania moves on forecasts that only the legalization of Ayahuasca can bridge. 

Milken Conference 2019 had a session on psychedelics,  Tim Ferris moderated a panel

in front of a standing-room-only crowd at the Milken Institute’s Global Conference 2019. It includes a great overview of psychedelic science, investing opportunities, anecdotal personal benefits, legal challenges, and much more.

Motivational guru Anthony Robbins recently released a book calling private equity the "holy grail of investing."  Robbins spoke of his experiences with Ayahuasca in a podcast.  He didn't say if that helped change his view of PEUs.

The upcoming Milken meeting runs May 5-8, 2024.  It's theme:  "Shaping a Shared Future."  Seems a bit dubious given the PEU boys' propensity to not share.  

Monday, February 26, 2024

PEU Biden Family Office


President Joe Biden has long loved private equity underwriters (PEU).  His son Hunter is one and Biden's Cabinet is chock full of them. 

Flashback to 2012 to 2015 when Hunter Biden was coursing the PEU world:  Fox News reported:

"Our objective was to build a diversified private equity platform, which would be anchored by a globally known Wall Street brand together with a globally known political name," Galanis testified. "Our goal — that is, Hunter Biden, Devon Archer and me — was to make billions, not millions."

"Burnham was the focal point for integrating a ‘Biden family office’ into a large-scale financial company with international influence," he explained, adding that they acquired some of Hunter Biden’s companies like RSP Investments and Rosemont Seneca Advisors.
The greed and leverage boys dominate the executive and legislative branches.  The Carlyle Group cut its teeth hiring former political heavyweights and then levering their influence for PEU gains.  Carlyle co-founder David Rubenstein is famous for his role in the Great Eskimo Tax Scam.
In 1986, Stephen Norris, a lawyer for Marriott, learned of a change to the federal tax code recently initiated by Sen. Ted Stevens, Republican of Alaska. It allowed Alaska Native corporations, created under the Alaska Native Claims Settlement Act, to sell their paper losses at a discount to companies that could use them to reduce their own taxes. Norris started a business that matched companies with Native Alaskans and persuaded Rubenstein to leave Shaw, Pittman and join him. In a single year, they brokered the transfer of a billion dollars in losses, earning at least ten million dollars in fees. In 1987, they were on the verge of another big transfer when the government closed that loophole. The episode became known in Washington business lore as the Great Eskimo Tax Scam.
Jason Galanis did a Native American deal that landed him in jail:
Galanis is serving a 14-year prison sentence after pleading guilty to securities fraud based on bonds issued by a company affiliated with a Native American tribe in South Dakota. The funds were reportedly supposed to be used for certain projects but were instead used for his personal finances.
Selling influence, taking advantage of Native Americans, these are foundational events in PEU history.

The Biden PEU story shows how long the game has been underway.  For decades politicians Red and Blue have loved PEU, so much so, at times they are nearly interchangeable.  

Monday, February 19, 2024

Crown Prince Question for PEU Jared Kushner


The Wrap
reported:

Donald Trump’s son in law Jared Kushner doesn’t want to talk about the $2 billion he received from a fund led by Saudi Arabia’s Crown Prince Mohammed bin Salman in 2021, two years after the latter approved the murder and dismemberment of Washington Post columnist Jamal Khashoggi. 

 When faced with a question about the deal during an interview at the Axios BFD conference in Miami on Tuesday, Kushner asked, “Are we really still doing this?

After leaving the White House Kushner formed Affinity Partners, a private equity underwriter (PEU).  Kushner went from running the country to running the country stealthily, bolstered by $2 billion in Saudi investments.  

The story made me wonder how Jared fared on Cadre, a tech real estate company he co-founded in 2014.  I'd seen where David Rubenstein's family office Declaration Partners had a stake in the firm.  Declaration bought its Cadre stake in January 2018.


NYT reported in March 2020:

President Trump’s son-in-law and adviser Jared Kushner is selling his stake in Cadre, a New York-based real estate start-up that has sought to profit from a special tax break (opportunity zones) included in the package Mr. Trump signed into law in late 2017. 

In selling his stake, Mr. Kushner also took advantage of a special federal program that would allow him to defer paying income taxes on any gain on his investment in Cadre, which he helped found in 2014. 

Any taxes owed could be avoided permanently if Mr. Kushner transfers the new investments he made with the proceeds of the Cadre sale to his heirs, without ever selling them.

In November 2023 Yieldstreet announced it would acquire Cadre.  


Nobody knows how Jared or David Rubenstein made out on Cadre.  Private is private.  It certainly helped that Jared could exit his stake tax free, three years into his "public service." 

The greed and leverage boys forgave the murderous Crown Prince years ago.  That explains Kushner's indignation at the question.  The money is too good to pass up.

Sunday, February 18, 2024

The PEU Cycle


Twelve years ago the public learned about policy making billionaires.  Two years ago we learned that they like operating in secret, behind the scenes:

The main reason Billionaires practice stealth politics, Benjamin Page says, is that taken collectively, their political preferences do not align with what a majority of Americans want.

“What we see basically is a class of people who have more money than God, who are very politically active in relatively unknown ways and who we have reasons to believe have been politically influential and have used their political influence in ways that don’t really serve the interests or preferences of what most Americans want.”

Many of those policy making billionaires are private equity underwriters (PEU).  That leads to the next level of the unvirtuous cycle, elected officials.

And yet Americans whose interests are not being served by those wealthy contributors are being swayed by politicians working toward the billionaires’ ends.

“They’re mobilizing them on the basis of cultural grievances,” Lacombe says. “And I think those two things in conjunction are fairly large contributors to the dysfunction that we’ve observed in American politics.”

Government is not protecting citizens from the dangers of big tech or cryptocurrencies.  Maria Ressa raised concerns long ago about predatory tech companies.

Ressa blames Big Tech for the spread of corruption and dishonesty, saying it “insidiously manipulates at the cellular level of democracy.” She cited an MIT study from 2018 that found that social media is designed to spread lies six times faster than truth to keep users scrolling.
Ironically Ressa's words were delivered in the David M. Rubenstein Lecture at Duke's Sanford School of Public Policy.  Rubenstein co-founded The Carlyle Group, a politically connected PEU.  Carlyle's co-founders qualify as policy making billionaires.

The public is not being served by the layers above us, Policy Making PEU Billionaires, Elected Officials/Government Organizations or Big Tech/Crypto.  It's common for manipulators to migrate through these various categories.

Money and greed are driving the system, not public good.  A few rich people are being served.  That's for the most part, not you or me.

Thursday, February 15, 2024

Forbes PEU Briefing on Juggernaut Blackstone


Forbes Daily Briefing recently focused on Blackstone.  Much of the video sounded like a private equity informercial.  The briefing highlighted Blackstone's international footprint, citing a number of details:

Paris - new 26,000 square foot office

Frankfurt - opened 14,000 square foot office

17 offices around the world, double international headcount in just five years

Toronto -- new office, first in Canada

Singapore - doubling staff

India - owns forty companies and largest real estate operator, top performing Asian market

Globally, private equity investment is in "its infancy"

$80 trillion wealth globally for Blackstone to tap

Their briefing nailed Blackstone's global growth story and future opportunity. Forbes then juxtaposed "old" private equity with the "new" alternatives version. 

  


The narrator said:

"Traditional private equity--raising money from large institutions to acquire stodgy companies, taking on mountains of debt and then slashing costs and rejiggering the capital structure for quick profits--that's dying or at best, a slow growth business."

Language like that would not have gotten any Forbes reported access to storied private equity founders like Blackstone's Stephen Schwarzman.  Flashback to Summer 2011:

There are very few people out there who will talk and write honestly about private equity. I know from personal experience that the financial press is so eager to break news on "deals" that reporters (who are increasingly compensated on the number of "market moving stories" they write) can't afford to be critical of Carlyle, KKR and Blackstone, and risk losing access to people at those firms.
New private equity is "alternatives:"

The new game, dubbed alternatives, is all about growth.  Firms buy companies in areas like logistics, infrastructure, life sciences and e-commerce, and make them bigger not smaller.

That rings untrue as private equity underwriters (PEU) have long said they offered "growth capital" and for some time invested in many of the listed industries.  Sponsors frequently made affiliates bigger through acquisitions. later monetizing them.

Blackstone Infrastructure Partners is nearly seven years old.

BIP was formed in 2017 with a $20 billion long-term matching anchor commitment from the Public Investment Fund of Saudi Arabia.
Back to new private equity or alternatives as described by the narrator:

Unlike old school buyouts in which fund lifespans were limited to ten or twelve years, contributing to a slash and churn culture, the hottest funding source in the business is now something called perpetuals.  Buyout funds that are often individual investor friendly and have no end date.

Blackstone's new schtick it to buy and hold.  New funds enforce this by limiting redemptions.


To .sum up, Forbes believes the "greed and leverage" boys were once evil, but have seen the error of their ways.  They've turned over a new leaf and are now the "fee and credit" boys.  Amend that to "fee and senior credit boys."

PEUs mostly took over companies by buying equity.  The future suggests they will take over firms by holding senior credit positions and force debt restructurings.  It's not new.  

Ask the Brintons' family.  They once had a stodgy British carpet company.  The Carlyle Group bought discounted debt and pulled the capital rug from under "the owners."

Credit is the new/old way for PEUs to get affiliates.  As for their metastasizing around the globe my wise friend said:

We are perpetually ****.  They don't have to sell, They monopolize everything, they are funded, subsidized and take advantage of every TAX destination available.
My friend shared a graph that shows how the super-wealthy's advantages are perpetual.  


I added two lines, one for the 2008 financial crisis and another for 2013 when the World Economic Forum targeted income inequality  The top 1% blew through both of those potential barriers.

Forbes Blackstone piece suggests they will continue blowing.

Update 2-25-24:  Politicians Red and Blue love PEU and increasingly, more are one.  They serve the billionaire class, not the middle class.

Wednesday, February 14, 2024

Tony Robbins PEU "Holy Grail" is Cracked Shot Glass


Motivation guru Tony Robbins released his new book, the third in a trilogy, titled "The Holy Grail of Investing."  It's about private equity underwriters (PEU).  Tony and co-author Chris Zook are huge PEU fans.  

Brian Sullivan of CNBC interviewed Tony about his new book.  Tony shared the following framework in the interview.


They started with general partnerships.  Robbins explained how PEU fees go to the general partner, 2% annual management fee and 20% of profits from any investment.  Tony said:
"You can get the 2 and 20."
Robbins cited a firm in Houston, CAZ investments that sells GP stakes in private equity firms.  And the head of that firm is Tony's co-author Chris Zook.


Caz Investments fund listing has the same seven strategies as Robbins interview.  The only difference is Tony added "disruptive technologies" after venture capital.  Caz uses those words in their website description of venture capital


Tony owns GP stakes in 65 PEUs thanks to CAZ.  He didn't say anything about fees associated with buying those stakes.  

Robbins did not mention that "the 2 and 20" are topline revenues.  From those PEU expenses are paid.  "You get the difference between the 2 and 20 and operating costs in proportion to your holdings." 

Flashback to 2015 when Tony released "Money:  Master the Game."  Investment News reported:
The move into financial services has been several years in the making, according to Mr. Robbins, who said he began to turn his attention to investing after 2008.   “I saw so many people suffering,” he remembers. 

He watched “Inside Job,” a 2010 documentary that charged top players in financial services, enforcement and politics had caused the market collapse, and decided that he wanted to advocate for the average investor

"It’s not an evil industry.  It’s an industry that has been set up where making a profit is the largest goal.” Tony Robbins 

He spent the next four years interviewing well-known figures in financial services, including Charles Schwab, Warren Buffett and Ray Dalio, founder of hedge fund investment firm Bridgewater Associates.

(The book is) a fierce indictment of an industry he says is not acting in clients’ best interests and is selling overpriced products to investors who don’t understand what they are paying for.  One of the myths in his book is, “I’m your broker, and I’m here to help.”
Robbins told CNBC's Sullivan he wasn't looking to write a third book.  
"But I had a chance to interview thirteen of the Masters' of the Universe, masters of private equity."
These guys don't give their time away lightly.  It's not clear why Tony changed his mind but I imagine it involves personal PEU investments that he wants to grow exponentially.

Tony quoted annual returns of 20%, even 30%, numbers the PEU boys have thrown around for decades.

Institutional Investor recently ran a story on a University of Southern California economics professor:
Professor Phalippou has also become the bĂȘte noire of private equity, which he has deconstructed in academic research dating back to 2003, when he first learned that “data point after data point . . . I found that virtually everything sold as a fact was not quite so,”

The professor’s fame exploded in 2020 with a blockbuster paper titled “An Inconvenient Fact: Private Equity Returns & the Billionaire Factory,” which laid out how the asset class has created massive fortunes for the owners of private equity firms.
Phalippou's analysis poked large holes in PEU outsized returns, the tantalizing ones tossed around by Robbins.  

The Institutional Investor story noted difficulties facing PEUs.  
Fundraising is down, firms have been unable to unload their portfolio companies at a profit, and high interest rates are beginning to take a toll on their heavily indebted holdings.
Bloomberg reiterated those facts with their story:


Who better for Robbins to motivate?  Downtrodden greed and leverage boys in need of a capital injection.

What is a PEU to do if they can't flip affiliates for grand returns?   Sell some of their equity, i.e. GP stakes at a premium.  

A decade ago Tony Robbins purported to "clean up" the investment advisory industry.  
“And he’s really coming in as an amazing champion of the concept of the fiduciary standard, where the investor really deserves to have someone who is looking out primarily or solely in their best interests.”
One publicly traded private equity disclosed in 2015 under "risks":
Investments in highly leveraged entities are also inherently more sensitive to declines in revenue, increases in expenses and interest rates and adverse economic, market and industry developments.
That same PEU disclosed in 2012:
Contracts between us, on the one hand, and our general partner and its affiliates, on the other, will not be the result of arm’s-length negotiations.
Cleanup is needed.  Tony Robbins is far away from a fiduciary standard in his blatant promotion of the greed and leverage boys.

My wise friend recently wrote in two different communications:
We are going from "who took the cheese" to "we are on the cheese plate." 
No one wants price stability or prices to come down. Everyone wants to be saved no matter how reckless they behave in the way they finance, in the way they take risk, in the way they leverage BUT if the little guy needs A crumb to make it through the day or if it was his investments in the tank, they would coat him in tar and flatten him with a roller pushed by an 18 wheeler with turbocharged diesels. I don't know how more people aren't disgusted.
Private equity wants individual investor money (cheese plate) while they try to save their highly leveraged entities (affiliate values not going down).  

Robbins did not talk about Pro Sports Ownership in the Sullivan interview but the public saw Carlyle Group co-founder and Declaration Partners founder David Rubenstein lead a PEU club deal for the Baltimore Orioles.  I asked my wise friend how Rubenstein might change the rule of baseball.  He stated:
Change the rules? Rubenstein will figure out a way to borrow three times the high end estimate in the shadow market non-recourse. He will then transfer ownership into another entity avoiding all tax liabilities. The players will have to buy their own benches. Any fan will be tokenized and have to pay a fee to park at the stadium. Rules are made to be broken.
I trust my wise friend more than Tony Robbins.  

Full disclosure:  I invested in Robbins' DreamLife when it went public via a "reverse merger into a shell" in 1999-2000 and lost money.  That was Robbins first PEU dance but clearly not his last.  He's Texas Two Stepping with CAZ.

Update 2-15-24:  More billionaire non-arm's length transactions, one involving private jets.

Update 2-17-24:  FT reported:
Last quarter, Carlyle earned a 37 per cent margin on its fee revenue, while Blackstone earned 57 per cent.

You don't get the whole "2 and 20." 

Update 2-21-24:  Fresh off the press is another PEU book by former Carlyle Communications Chief Chris Ullman.

Tuesday, February 13, 2024

David Rubenstein Show: Early Season 8 Not Aging Well


Season 8 of the David Rubenstein show started with 23andMe CEO Anne Wojcicki and episode 3 starred Sam Bankman-Fried.  SBF currently sits in jail.  Wojcicki is scrambling to hold onto 23andMe's NASDAQ listing while trying to rescue her company from a monster data breach and a burgeoning financial crisis.  Yes, she was at the helm the whole time.

David Rubenstein asked Wojcicki about going public via an SPAC with Sir Richard Branson.  Her reply included: 

I'm very much of a CEO,,,I like to operate and I like to be in the weeds, like how are we executing.

3 and Me's stock imploded from a high of just over $17 to 74 cents today.  The stock has been as low as 54 cents recently.  Salon reported last week:

The company’s DNA database contained the most sensitive medical information of at least 14 million people — and 6.9 million of them had their genetic data stolen and put up for sale. Each person’s file contained account IDs, full names, sex, date of birth, full DNA profiles and location. Of that total, more than a million Ashkenazi Jewish profiles have also now been curated into a list by attackers. 

The cyberattack went unaddressed from April 29 to Sept. 27, and the company finally asked people to change their passwords in October. By December, it notified customers of the breach, according to TechCrunch. And, by Jan. 11, calls began for Congress to investigate.

Hands on Anne Wojcicki oversaw the company's response which blamed customers:

...users negligently recycled and failed to update their passwords following these past security incidents, which are unrelated to 23andMe.  Therefore, the incident was not a result of 23andMe’s alleged failure to maintain reasonable security measures.
There may be feces in those weeds.  Rubenstein closed the interview with Anne Wojcicki:

Would you be upset if they (your kids) went into something important like private equity?

Private equity may be in 23andMe's future.  Both love new drug discovery.  Declaration Partners has affiliate Synthegro, which does gene editing to cure diseases. 

Synthegro:  CRISPR-based genome engineering company delivering industrial scale-tools, consumables, and services

Mr. Rubenstein's interview with SBF was notable for many reasons.  At the top of my list is the pair's failure to disclose their respective ownership stakes in Paxos.  CoinDesk reported:

After Bankman-Fried's arrest Paxos was ordered by federal officials to "freeze $19 million worth of crypto tied to the bankrupt FTX exchange."  

SBF hit Rubenstein's family office up for a big investment in FTX.  Barron's reported that Declaration Partners turned down FTX.  When asked if he invested in FTX Rubenstein said:

I didn't.  My family office team looked at FTX at the $30bn valuation [earlier this year]. It didn’t move forward, and the memo never reached me, but the other day they showed me what they had prepared. The memo pointed out all the concerns about conflicts of interest. There wasn’t a lot of transparency. 

Rubenstein had research on FTX at his disposal prior to his show's softball SBF interview and did not use it.  "Conflicts of interest" and "lack of transparency" are standard features of private equity.

SBF's vaunted "risk management" was nonexistent.  Anne Wojcicki's security measures sacrificed half of her customers confidential information.

CNBC reported:

During 23andMe’s quarterly call with investors, co-founder and CEO Anne Wojcicki said the company is considering splitting up its consumer and therapeutics businesses to help expand its investor base.
Will Carlyle of Rubenstein's Declaration Partners offer Wojcicki pennies on the dollar for 23andMe assets?  Will a PEU debtholder take over the company through a debt cramdown, the way Carlyle took over Brinton's?  

Let's hope Rubenstein's other interviews age better.  These particular "peers" rose and fell.  Billionaires no more.