Tuesday, March 4, 2008

Carlyle's Sarkosy Educates Markets

Oliver Sarkosy, brother of the French President, offered several pearls of wisdom to Matt Arnold of the Financial Times. He spoke first of his new job with the Carlyle Group.

“The principal opportunity is to arbitrage public markets’ difficulty in valuing financial firms with a corporate finance ability to provide a solution to help rebuild the business model. It means coming into a company with a balance sheet problem that you can solve at a valuation that is attractive to you,” Sarkosy said. “This requires big capital infusions.”

Public markets difficulty in valuing financial firms arose from what? Did it arise from credit rating agencies packaging junk debt as AAA rated? If so, financial firms are unsure of the quality of debt they're holding. Did it come from financial firms creating a mortgage packaging and resale industry that generated huge fees and income for several years? With that innovative product wiped out, where will future earnings get their desperately needed boost?

Supposedly Mr. Sarkosy and his PEU brothers at Carlyle know how to value publicly traded financial firms, offer them lifesaving capital, and end up with a significant ownership chunk of the business. Guess whose investment gets diluted under this model? Current shareholders. Remember Enron and their many stooged shareholders? Count on something less drastic, but similar as many shareholders purchased mostly vapor.

"We are seeing an inability of public markets to properly value risk, due to both the lack of transparency in the sector and the fact that if things go wrong they go to zero very quickly,” he said. He said investment opportunities would stem from the need for new capital to repair stricken balance sheets as well as a secondary round of restructuring triggered by a likely regulatory backlash. “We are looking at making a number of minority investments with influence,” he said

I find it interesting Mr. Sarkosy cites a lack of transparency in public markets. Private equity underwriters are not known for their openness. Carlyle's recently got a $1.35 billion investment from a more secretive group, a United Arab Emirates sovereign wealth fund.

Sarkosy's "things going wrong" was a multi-year loosening of credit to generate commissions and fees up and down the home mortgage chain. Greed drove the debacle. Private equity firms have the same motivation. "Make me money" is the chant frequently intoned by William Conway, one of the founders of Carlyle.

The "likely regulatory backlash" won't come from the Bush administration, claiming things are already clearer. His SEC just proposed relaxing standards for foreign firms. They don't have to meet U.S. accounting standards, only post their financials in English on their web site. Yet another Bush high standard.

Does anyone else find it ironic that the secretive private equity business model is citing lack of transparency in public markets as a major failing? Adding to the irony is the mantra that private companies can kick government's ass, anytime or any day in performance, yet those same PEU's are being bailed out by foreign government owned investment corporations. But a closer look at who's helping who reveals the good ole boy chain on both sides, the government and private sector. Carlyle perfected the PEU model and Sarkosy's their latest politically connected muckety muck. Keep your eyes open, there will be more.