Carlyle Group Signs Deal for Australia's Contract Aviation

Life on the U.S. government teat has been so profitable, The Carlyle Group will suckle Down Under. Carlyle inked a $350 million deal for Australia's Contract Aviation, a merger of Alliance Airlines and Airwork Helicopters. The Australian reported:

The companies provide helicopter and aviation services to the government, military and resources sectors.

Contract Aviation was planning an IPO valued at $300 million. Investors pocketed $50 million more in the Carlyle deal.

Given heightened private equity underwriter (PEU) interest in Australian companies, tax tea leaves must read green.

The Carlyle Group and Tenet: Two Ethics Abusers in a Bidding War

HealthScope, an Australian hospital company, should conduct due diligence on its bidders. Their suitors include:

1. The Carlyle Group, TPG and Blackstone
2. KKR-CVC
3. Tenet Healthcare

Two firms on this list are serial ethics abusers. The Carlyle Group has a long history of "pay to play" in the pension fund arena, while Tenet Healthcare paid a $900 million fine to Medicare and Medicaid.

They share more than a questionable ethics history. Between The Carlyle Group and Tenet, 35 patients perished after Hurricane Katrina in Memorial Medical Center. This fact was omitted from the White House Lessons Learned report.

A year after Frances Townsend's Katrina whitewash was foisted on the public, Tenet appointed Jeb Bush to their board of directors. Records show Quinn Gillespie & Associates, discussed corporate governance changes with the Executive Office of the President in early 2006.

Florida Governor Jeb Bush fined Tenet for abuses, before joining the board as a highly paid member. In three short years Jeb acquired 215,000 shares of beneficially owned Tenet stock, worth $1.2 million.

As for the Carlyle Group, they're vigorously defending lawsuits related to their 25 Katrina deaths.

Will HealthScope find any of this? My hope is they do.

4 Out of 5 PEU's Want their Mitts on HealthScope

KKR will join the bidding for Australian hospital company HealthScope. The Carlyle Group, TPG and Blackstone are already at the table. Four of the five world's largest private equity underwriters (PEU's) are vying for HealthScope.

A third bidder may be a U.S.-based private hospital operator being advised by Citigroup Inc. HCA, Community Health Systems (CHS) and Tenet Healthcare are sizable players. However KKR's HCA is in line for an independent public offering. Tenet is a serial ethics abuser and owner of Memorial Medical Center, where 35 patients died after Hurricane Katrina.

Deals involving HCA and CHS added over $2 billion in interest costs to America's health care system. How much interest expense would a PEU buyout of HealthScope add to Australia's health burden?

PEU's want to sell the pathology business and put hospital facilities into a real estate fund. It's not clear if the private hospital company would follow the same strategy. PEU interest in hospitals isn't solely a Down Under phenomena. A flurry of American deals are underway.

Could Morgan Stanley & JP Morgan Help Save the Gulf?

Wall Street firms could aid Uncle Sam with the Deepwater Horizon oil catastrophe. Morgan Stanley and JP Morgan charter supertankers and very large crude carriers (VLCC's). Such ships could be used to vacuum up the horrendous Gulf oil spill.

Esquire reported the Saudi's use of supertankers on a 700 million gallon oil spill. Where are the tankers? Zero Hedge wrote:

145 Tankers & 127 Million Barrels at Sea

According to research by Gibson Shipbrokers, one in twelve of the world’s largest crude oil tankers are being used to store oil rather than transporting it.

Bloomberg gave a good visualization of this massive convoy: “Those storage tankers, if lined up end to end, would stretch for about 26 miles, enough to blockade the English Channel.”

The man who helped the Saudi's said:

NICK POZZI: Keep in mind that what supertankers typically do is they sit in the middle of the ocean waiting for all the traders to come up with the right price. When they feel that the price is right, the tankers that are full, they take off, and they can be anywhere in the world in a few days. Right now there are probably 25 supertankers, waiting for orders, full of oil. So all they got to do is come to Texas, in the Gulf, unload the oil, and then turn around and suck up all this other stuff and pump it onto shore into on-shore storage. It's not rocket science. It's so simple. It's a Robinson Crusoe fix, but it works.

President Obama skirted the supertanker question in his press conference. Should he be interested, one phone call can get him inside Morgan Stanley and JP Morgan. Dial the Erskine Bowles household.

Erskine sits on the board of Morgan Stanley, while his wife is on JP Morgan's board. The club is relatively small. Who knew the Deficit Commission co-chair could make up America's glaring deficit in disaster management?

I'm sure Wall Street is searching for ways to pay back Uncle Sam for trillions in bailout support. A few chartered supertankers is the least they can do. So far the press is quiet on any offers of Wall Street aid. Meanwhile, the "in charge" Obama team turns down international offers in a Katrina like redux.

Triumph Shareholders Approve Vought Acquisition from Carlyle Group

Over 99% of Triumph shareholders approved the purchase of Vought Aircraft Industries. The seller is The Carlye Group, a politically connected private equity underwriter (PEU). Vought is the latest in a string of monetizations for Carlyle.

It's also a disturbing case of corporate welfare. Texas Governor Rick Perry gave Vought $35 million in 2004 in return for 3,000 new jobs. The Carlyle Group sent those jobs to Charleston, South Carolina, home of an influential Senator with defense connections. When 2009 ended, Carlyle hadn't added one new Texas job. It employed 35 fewer people at its Texas sites. What penalty did Carlyle pay? Very little. Instead of $3.5 million plus five years of accrued interest, Vought paid back $900,000.

The problem is soon to be Triumph's. Maybe, business reporters will pick up the story after The Carlyle Group's sale.

McKinsey on PEU's "New Ecosystem"

McKinsey Quarterly featured an interview with Carlyle Group cofounder David Rubenstein. The promo says Rubenstein "discusses the new ecosystem he sees developing for the private-equity industry."

David Rubenstein said:

I do think that the large private-equity firms, the largest ones—KKR, Blackstone, Carlyle, TPG, Apollo, Bain—will aggregate even a larger percentage of capital that’s available, because their brand names, I think, give investors some comfort. These firms all survived the recession in reasonably good shape.

And I think all these firms are going to become what I’ll call “alternative investment-fund managers.” They won’t just be private-equity firms. They’re now going to expand their offerings so they have not just private equity but they might have real-estate funds, infrastructure funds, distressed debt funds, and credit funds, and just all kinds of different funds.

Hedge funds. Hedge fund of funds. Private-equity fund of funds. So they can use their brand name and help sell those funds around the world, but also acquire very talented people who could manage these funds. I think virtually all of these funds and firms will probably be public entities within five years or so.

The new face of private equity underwriters (PEU's) is much like the past. The Carlyle Group had a hedge fund, BlueWave Partners and a publicly traded alternative investment, Carlyle Capital Corporation. Both imploded in 2008. However, Carlyle doesn't count these blemishes.

We’ve averaged about 30 percent gross internal rate of return on all the money we’ve invested—almost $60 billion of equity over the 23 years or so of the firm.

It'd odd that McKinsey used the word ecosystem to describe men age 55-65 monetizing their PEU holdings via independent public offerings (IPO's). Rubenstein said:

Most of the founders of these global private-equity firms are probably between 55 and 65. And at some point, they want to monetize what they have built, and I think the IPO helps monetize it.

How did Rubenstein sell aging white men cashing in?

We need to make a better case that we are paying taxes, we are sensitive to environmental concerns, we are sensitive to socially responsible investment principles. I think the private-equity industry may be a little late to that game.

Odd, David and his peers were on Capital Hill lobbying against "paying taxes." I bet they weren't late to discussions with Senators.

Australia Stuggles with Bloody PEU Games

While private equity legends lobby the U.S. Congress to maintain their preferred tax status on carried interest, a similar struggle occurs Down Under. Private equity underwriters (PEU's) want "tax predictability," code words for the lowest taxes possible.

Their tools include loading up affiliates with debt, which raises interest expense dramatically. PEU's siphon cash from affiliates via management fees and special dividends. They use transfer pricing to move untaxed dollars throughout their global clutches.

The question is how infected are Australian politicians? America's Red and Blue Corporacrats have done private equity's bidding three times on carried interest. Will there be a fourth?

Has Tony "I'll sell my soul for pounds" Blair signed on with any Aussie firms? Disguise his war crime indictment as a check and justice might be served.

Carlyle Group Sails into Hampton Roads Bank

Two private equity underwriters (PEU's) will take big stakes in Hampton Roads Bankshares. The A combined Carlyle Group and Anchorage Advisors will control 46.2% of Hampton Roads voting equity. Hampton Roads received TARP funds. The Treasury plans to convert its preferred shares to common stock. Here's the planned ownership breakdown according to SEC filings:

Carlyle Group - $72.6 million = 23.1% of common stock
Anchorage Advisors - $72.6 million = 23.1% of common stock
U.S. Treasury - $80 million = 6.4% of common stock

The news release said nothing about Hampton Roads' deferred dividends owed to Uncle Sam. MarketWatch reported:

Under the terms of the TARP Preferred Stock, the Company is required to pay on a quarterly basis a dividend rate of 5% per year for the first five years, after which the dividend rate automatically increases to 9% per year. Dividend payments may be deferred, but the dividend is a cumulative dividend and failure to pay dividends for six dividend periods would trigger board appointment rights for the holder of the TARP Preferred Stock.

The company missed dividend payments in November 2009 and February 2010. What happened to the accrued dividends?

Hampton Roads isn't The Carlyle Group's first foray into banking's safe harbor. The FDIC provided $4.9 billion in subsidies for Carlyle's BankUnited deal.

Using taxpayer money to enrich PEU's is a common theme in Washington, D.C. That hasn't changed under financial reform.

The question is how the Hampton Roads deal feeds into Carlyle's other strategies, including their proposal to operate Virginia's ports. Carlyle is known for entering via the back door. How long before they're sailing in Hampton Roads on state taxpayer money?

FDIC Sells $233 million in Structured Notes

The FDIC sold $233 million in structured notes backed by commercial real estate loans. Their press release stated:

The sale was conducted through a private offering to qualified purchasers. The $233 million of notes are backed by performing and non-performing commercial real estate loans with a related aggregate unpaid balance of approximately $1.0 billion.

That's 23.3 cents on the dollar.

The sale of notes features three classes of notes with maturities of approximately 1.6 years, 2.6 years, and 3.6 years from the closing date.

What firms purchased their soon to rollover debt at a steep discount?

The note sale generated $222 million in proceeds. That's 22.2 cents on the dollar for institutions in receivership. The FDIC guaranteed debt is "backed by the full faith and credit of the United States."

Deeply discounted and fully guaranteed. The bailout continues.

Obama's Oil Spew Commission Chair on ConocoPhillips Board

President Obama named William K. Reilly and Bob Graham co-chairs of the Deepwater Horizon oil catastrophe commission. William Reilly was EPA Chief under President George H.W. Bush. He currently sits on the Board of ConocoPhillips, DuPont, Royal Caribbean, Evergreen Oil, Eden Springs Ltd., Enviance, AgraQuest and Energy Future Holdings.

Reilly is a Senior Advisor to TPG Capital, a private equity underwriter (PEU). He is President and CEO of Aqua International Partners, an investment firm owned by TPG and funded by U.S. Overseas Private Investment Corporation (taxpayer sponsored).

ConocoPhillips

Ironically BP and ConocoPhillips were fined in 2007 for oil spills. ConocoPhillips marred 21 miles of Puget Sound shoreline near Tacoma.

ConocoPhillips is currently helping BP with the Deepwater Horizon debacle. WSJ reported:

In Houston, the hub of BP's crisis response, the company's campaign has become an industrywide effort. Drilling and well-control experts from rivals like Exxon Mobil Corp. and ConocoPhillips are in BP's offices.

ConocoPhillips wants oil exploration to stay on track. It is ready to drill in the Arctic and has a joint venture with BP in the Gulf of Mexico's Tiber field.

London-based BP PLC said Wednesday it identified a "giant" prospect called Tiber more than six miles beneath the surface of the Gulf. BP, whose partners at Tiber include Houston-based ConocoPhillips, said its discovery could hold between 4 billion and 6 billion barrels of crude and natural gas.

Reuters gave an update in light of the oil catastrophe:

The chief executive office of U.S. oil company ConocoPhillips, Jim Mulva, told reporters on Wednesday the spill will likely hinder development of the giant Tiber discovery in the Gulf.

BP Plc is the operator of Tiber, Brazil's Petrobras owns 20 percent and Conoco has an 18 percent interest.

Surely, William K. Reilly is aware of CP's joint ventures with BP, including their Alaskan natural gas pipeline. Might his report do everything possible to keep ConocoPhillip's plans on track? Might he not want to offend on a business partner? Other BP investigations found conflicted chairs pulling punches.

Board Pay & Stock Holdings

Reilly's 2009 Board compensation is as follows:

ConocoPhillips - $246,515
DuPont - $279,526
Royal Caribbean - $154,400
Energy Future Holdings- private
Eden Springs - private
Enviance - private
Evergreen Oil - private
AgraQuest - private

Total - $680, 441

His stock holdings are:

ConocoPhillips-6,767 beneficially owned shares & 36,356 restricted stock units or $2.2 million

DuPont - 8,021 in outstanding stock awards, 20,000 in outstanding option awards, right to acquire 60,399 beneficially owned shares or $2.1 million

Royal Caribbean - 61,580 beneficially owned shares or $1.7 million

Energy Future Holdings - private
Eden Springs - private
Enviance - private
Evergreen Oil - private
AgraQuest - private

Total - $6 million

Royal Caribbean, Aqua International & OPIC/USAID

Reilly's Royal Caribbean (RC) worked closely with President Bill Clinton to bring private business to Haiti. RC's Labadee facilities received no damage in Haiti's horrific earthquake.

Haiti received $15 million in USAID funding to train Haitians in hospitality for employers like Royal Caribbean. Reilly's Aqua International Partners received taxpayer money via U.S. Overseas Private Investment Corporation funding. Foreign Policy in Focus states:

In the mid-1980s, OPIC began to establish private funds that purchase shares of ownership in overseas investments. By 1998, OPIC had launched almost 30 of these funds, such as the Poland Partners Fund and Aqua International Partners, to provide capital for investments in low-income countries and former nonmarket economies. OPIC selects the fund managers and provides long-term loans and loan guarantees that supplement a fund’s privately raised equity.

OPIC selected Reilly and TPG for Aqua International Partners.

William Reilly is a founding partner of Aqua International Partners, a private equity fund dedicated to investing in companies engaged in water and renewable energy.

Who knew "private oriented" Bill Clinton pioneered public capitalization of PEU's in the 90's? Slick Bill also marketed Aqua International during his 1998 Mission to Africa. Later, President George W. Bush supported Aqua International's expansion.

In October 2002, Overseas Private Investment Company's board of directors approved up to $245 million in OPIC financing to help establish three new investment funds, with a combined capitalization of more than $1.5 billion. One of the three beneficiaries was Aqua International. The board approved an OPIC guarantee of up to $70 million for the second fund, Aqua International Partners II, which will invest in companies involved in the treatment, supply, distribution, or protection of water in emerging markets. The fund has a total capitalization target of $220 million for investment in emerging markets, as part of a global water fund with target capitalization of $400 million.

The fund is a successor to Aqua International Partners I, formed in 1997 with $235 million in commitments, including an OPIC investment guarantee of $150 million.

The fund will target investments in projects involving products and equipment; desalination; bottled water and beverages; and infrastructure, with an eye to improving quality and safety, resource maximization, convenience of delivery, and competitive pricing. One report indicated that Aqua is supplying bottled water to U.S. troops in Afghanistan.

Conflicts of Interest

Reilly is co-chairman of the National Commission on Energy Policy, formed in 2002 and housed at the Bipartisan Policy Center. Seven Commission members are PEU affiliated, with three part of The Carlyle Group family. SemGroup and Booz Allen Hamilton are Carlyle affiliates.

One Energy Policy Commission member, Errol B. Davis, Jr., has been on the board of BP since 1998. Davis provided governance during BP's various fiascoes. How might Errol influence Bill, especially in light of their joint ventures and corporate common interests?

This isn't President Obama's first slippery appointee. How many conflicts of interest does this PEU co-chair have? Does William Reilly beat conflicted Erskine Bowles, co-chair of Obama's Deficit Commission? Maybe, maybe not.

Obama continues his PEU love. Will private equity's luck continue? They got a free pass under financial reform. How many of the five remaining slots can they land on Obama's Oil Spew Commission?

Update: The Maddow Blog linked to this piece on June 1. On June 4, William Reilly announced he would take a temporary leave of absence from the ConocoPhillips board. He did so to Rachel Maddow.

PEU's Escape Financial Reform

John Carney of CNBC noted private equity's free pass under financial reform, a fact PEU Report pointed out months ago. I noted Chris Dodd's giving six months for private equity to "be defined" and a year to study "self regulation." That came long after Obama's omission of shadow bankers in his reform plans. Shadow bankers include private equity underwriters (PEU's) and sovereign wealth funds (SWF's).

Ironically, private equity's big guns were outside Senate chambers yesterday, lobbying on carried interest taxation. Loyal Senators blocked bills in this arena for the last three years. I'm sure the PEU boys indicated that they won't pay higher taxes. The question is which workaround they'll employ.

Watch where Senators Chris Dodd and Evan Bayh land after their public service. It will be telling.

PEU Big Guns Lobby on Capital Hill

Blacktone's Stephen Schwarzman and Carlyle Group co-founder David Rubenstein pressed the flesh with lawmakers over "carried interest" taxation. Bloomberg reported:

Stephen Schwarzman, chairman of New York-based Blackstone, was in Washington yesterday to meet with lawmakers. He stood outside the Senate chamber in the U.S. Capitol carrying a three- ring binder, and greeted senators on their way to a vote.

Private equity underwriters (PEU's) are taxed at a 15% rate on their livelihood (investment gains), which can run into the billions. Ordinary citizens pay up to 35% on income. Three times the U.S. Senate blocked prior bills that would've eliminated PEU's preferred taxation. Schwarzman knew where to put his energy. He wasn't alone.

Schwarzman, David Rubenstein, co-founder of the Washington- based Carlyle Group, and Glenn Hutchins, co-founder of Menlo Park, California-based Silver Lake, were dispatched by the Private Equity Council, a Washington trade group, to argue against the tax increase, according to people familiar with the decision. Blackstone and Carlyle declined to comment. A Silver Lake spokeswoman didn’t return messages seeking comment.

These men are frequent visitors to Obama's White House. They clearly have elected officials ear. They also have a tax dodging workaround. Is it domestic or offshore?

Update: EPJ has an e-mail from the PEU Council mobilizing members on this issue.

Frances Townsend Goes Boarding

Frances Fragos Townsend sits on the governing board of two companies. One is publicly traded, the other a private subsidiary of an Italian firm. The companies are:

Scientific Games

DRS/Finmeccanica Defense Solutions

International lottery operator Scientific Games appointed Fran to their board on April 22, 2010. She stands to make $200,000 a year in compensation from SGMS, a public company. Frances received 10,000 shares in stock options upon her appointment. She serves on the Compliance Committee and the Nominating & Corporate Governance Committee.

Cash strapped states may sell their lottery revenue stream to private infrastructure investors. It remains to be seen if Scientific Games or major owner MacAndrews & Forbes Holdings bid on any state lottery fire sales.

Frances and fellow SG Board member Bob Kerrey can chuckle over old times, especially Townsend's favor to Tenet Healthcare, where Kerrey also sits on the board of directors. As White House Homeland Security Advisor, Townsend omitted Tenet's Memorial Medical Center from her Hurricane Katrina Lessons Learned report. Memorial lost 35 patients in the devastating storm, the highest hospital death toll. Tenet was responsible for 10 patients. The other 25 were LifeCare's, an affiliate of The Carlyle Group.

Townsend's omission worked to the risk management benefit of LifeCare and Tenet. Tenet lobbyists visited the White House while Fran crafted her report. They discussed corporate governance changes with senior Bush officials. Oddly, a year after the report's release, Jeb Bush landed a spot on the Tenet board. He was welcomed by Bob Kerrey.

As one of three members of SG's Nominating & Corporate Governance Committee, Kerrey was in a position to show Fran his gratitude. Committee minutes would show who put Townsend's name in the hat. They wouldn't be so gauche to state her past favor to connected corporate friends.

But on to Fran's other board slot, DRS/Finmeccanica. DRS Technologies was purchased by Finmeccanica in October 2008. Townsend's Baker Botts credentials show her as a proxy voting board member, but doesn't indicate her appointment date. Earlier this year, DRS Technologies reached $100 million in U.S. military orders. Did her Senior Advisor slot with Joint Forces Command (JFCOM) have any bearing on the Pentagon order?

Finmeccanica shows 6 divisions within the DRS brand. Townsend joins old friend General Peter Pace in providing guidance to Finmeccanica.

The Government-Corporate Monstrosity (GCM) grows. Many knew it as Eisenhower's Military-Industrial Complex. Federal budget steroids, injected the past decade, spread the GCM to health care, banking, infrastructure, intelligence, and homeland security.

Fran provided risk management for corporate friends while at the White House. She continues that service as a consultant for Baker Botts and paid corporate board member.

Most recently, Ms. Townsend provided consulting services and advice to corporate entities on Global Strategic Engagement and Risk as well as Crisis and Contingency planning.

She is consistent.


Update: Townsend was elected to the board of the Bipartisan Policy Center. They say they're lucky to have her talent and expertise. Did they read her hapless Lessons Learned report?

Update 2: Fran is Senior Advisor for Monument Capital, a D.C. based private equity underwriter.

Update 3:  Townsend was given the Paradigm Award by the Panhellenic Scholarship Foundation.

Update 11-22-10:  Townsend's latest title is  Senior Vice President, MacAndrews & Forbes Holdings Inc.

Update 5-7-11:  According to SIGA Technologies proxy filing, Fran is now on the board of Thomson Reuters.  I'm pretty sure top management wouldn't allow investigative stories on a board member.

PEU IPO's Give Worst 2010 Returns

Bloomberg reported private equity underwriter (PEU) sponsored IPO's in 2010 haven't fared well. The article stated:

The 13 offerings by private-equity funds have fallen 2 percent in the first month of trading after averaging gains every year since at least 2001, according to data compiled by Bloomberg and Greenwich, Connecticut-based Renaissance Capital LLC. The IPOs have also lagged behind the Standard & Poor’s 500 Index, while companies without support from buyout firms have beaten the benchmark gauge for U.S. stocks by 5.8 percentage points after their initial sales.

The piece mentions The Carlyle Group's Niska Gas Storage and Apollo's Metals USA as losers. It highlighted KKR and Bain Capital's upcoming IPO of HCA, the huge for-profit hospital company. Bloomberg failed to mention HCA's $2.25 billion in special distributions to PEU owners in 2010.

The PEU milking continues. Sometimes the product sours.

The Carlyle Group's Transparency

The Carlyle Group's 2009 Annual Report hit the wires. It was the best of times, despite it being the worst of times for the politically-connected private equity underwriter (PEU). Carlyle "raised" over $15 billion in the economic depression. Here's their slant:

Despite the challenges in the fundraising markets, Carlyle had final closes on nine funds totaling $15.6 billion in capital commitments from January 2009 through March 2010. The funds include:

Carlyle Asia Partners III, L.P. at $2.55 billion
Carlyle Asia Growth Partners IV, L.P. at $1.04 billion
Carlyle Asia Real Estate Partners II, L.P. at $485 million
Carlyle Global Financial Services Partners, L.P. at $1.1 billion
Carlyle MEN A Partners, L.P. at $500 million
Carlyle Mezzanine Partners II, L.P. at $553 million
Riverstone/Carlyle Global Energy and Power Fund IV, L.P. at $6.0 billion
Riverstone/Carlyle Renewable and Alternative Energy Fund II, L.P. at $3.4 billion
A small global credit fund.

Despite their citation of Carlyle as "an industry leader in accountability, transparency and corporate responsibility,” the report failed to mention $70 million in settlements regarding a New York pension "pay to play" investigation. Here's that breakdown:

1. Carlyle Group--$20 million
2. Riverstone Holdings--$30 million
3. David Leuschen, founder of Riverstone--$20 million

The report mentioned the BankUnited deal and it winning the "Financial Institution Deal of the Year Award." Carlyle stated:

Florida’s BankUnited was reestablished as a strong and well-capitalized bank as the result of an investment made by Carlyle and other investors in 2009.

It failed to cite $4.9 billion in FDIC subsidies, a considerable source of capital. Uncle Sam is a major benefactor for Carlyle. That is one of many facts not illuminated in this transparent report. Carlyle went light on their failures.

Carlyle Group Sheds PEU Label for GAAMF

The Carlyle Group is no longer a private equity underwriter (PEU). The old PEU is now a "global alternative asset management firm" (GAAMF). Not long ago, Carlyle co-founder David Rubenstein proposed "change capital" or "value added equity" as new names for private equity. The firm's top three settled on GAAMF. Ending the acronym with MF could be a disturbing sign.

Don't worry, PEU Report won't become GAAMF Report, not anytime soon. I have to wait for Congress to define private equity and study PEU self regulation as part of "robust" financial reform. That should take two years. Meanwhile, private equity's free pass continues.

The Carlyle Group's Leasebacks in the Outback?

Carlyle Group co-founder William E. Conway, Jr. recently warned Australia on tax predictability. Yet, his private equity underwriting (PEU) firm bid on Healthscope, an Australian for-profit hospital chain. The Australian reported:

A JPMorgan analyst said the potential new owner could sell some property to pay for growth or reduce debt. ( I covered this in a prior post)

"Motivation for private equity interest could be to separate the hospital operating company and the hospital land, and to divest the hospital property to pay down debt," the analyst said in a research note.

"We feel that sale and leasebacks could be used by private equity to streamline Healthscope's hospitals."

Streamline? More like milk. Carlyle split Manor Care's real estate and long term care operations. It sold commercial mortgage backed securities (CMBS), thus providing a source of capital for the deal. It conducted a "sale and leasebacks."

"Sales" occur at enhanced valuation levels. Thus, "leasebacks" mean higher lease rates, which are passed on to the health care operations division. In America such costs roll up into Medicare cost reports, a major basis for government reimbursement. Uncle Sam pays a healthy chunk of increased facility costs. Such costs become the basis for hospital negotiations with private insurers.

Separating real estate and health operations adds a liability advantage. In the case of malpractice lawsuits, the deep pocket is much shallower without the value of a hospital building.

William Conway hates a level playing field, as well as paying taxes. But he is happy to engineer schemes milking the federal government on behalf of Carlyle's health care affiliates.

Carlyle's ManorCare benefited from an Obama stimulus tax break for companies buying back debt for pennies on the dollar. In the double win, Conway purchased discounted debt with preferred tax advantages.

I expect Bill to extend the same discourtesy to Australians. It remains to be seen how PEU chaired government reform efforts will change the U.S. table, already tilted in favor of PEU's. Using financial reform's PEU free pass as my guide, I won't hold my breath for change.

Carlyle and company may have to kick in more change, should Healthscope demand a higher bid.

Carlyle Group Bids on Aussie Hospital Chain

A consortium of private equity underwriters (PEU's) placed a confidential bid on Healthscope, an Australian hospital company. The Carlyle Group and TPG are amongst the PEU's bidding on Healthscope. The Carlyle Group already owns a chunk of Turkish hospital operator Medical Park Hospital Group.

BusinessWeek reported:

Healthscope owns or operates 43 private hospitals in Australia, including the Prince of Wales Private Hospital in Sydney’s eastern suburbs and Melbourne Private Hospital on the fringe of the city’s central business district.

Healthscope has high cash flow and divisions capable of being sold off, attributes prized by PEU's. Healthscope stock rose 17% on news of the bid.

Will domestic PEU owned hospitals compete with PEU sponsored medical tourism? Stay tuned.

Update: Carlyle and TPG increased their bid for by 25 cents a share

Carlyle Group Building Ports Portfolio

Bloomberg reported The Carlyle Group is one of five reported likely bidders on Istithmar’s port and shipping agent, Inchcape Shipping Services. Istithmar describes Inchcape as "world's largest private Marine Management services provider." Inchcape Shipping has 237 offices in 60 countries around the world. They serve the following U.S. cities (according to their website):

Baltimore

Beaumont

Brunswick

Charleston

Corpus Christi

Galveston

Georgetown

Honolulu

Houston

Houston Headquarters

ISS Global AMS and ENOA/D Service Center-Portland

ISS Machinery Services Ltd. New Jersey

ISS Service Centre - Houston

Jacinto Port

Jacksonville

Lake Charles

Long Beach

Miami

Mobile

New Orleans

New York / New Jersey

Norfolk

Pascagoula

Philadelphia

Point Comfort

Port Everglades

Portland, Maine

San Francisco

San Juan

Savannah

Seattle WA

Tampa

Wilmington

Portland OR (USA)

St. Croix

Morehead City

How might this help Carlyle should they win Inchscape from their Dubai based owners? Tapped out state governments are looking to monetize public infrastructure. The Carlyle Group submitted a conceptual proposal to operate Virginia's ports in 2009. Galveston, Texas may soon seek bids from "private partners."

Carlyle's Virginia aspirations may get a boost from the chair of the Governor's Restructuring Commission, an ex-Carlyle Senior Advisor. State governments are bad at due diligence with politically connected, but ethically challenged private equity underwriters (PEU's). Connecticut inked a deal with Carlyle on 23 rest stops, this despite direct experience with their nefarious behavior.

This wouldn't be the first deal between Carlyle Group and Istithmar World. Carlyle sold U.S airport operators, Landmark Aviation and Standard Aero, to Istithmar affiliate Dubai Aerospace in 2007.

The airport deal occurred between the Dubai Ports World outrage and the NASDAQ/Dubai Bourse sales uproar, only Carlyle's deal warranted barely a peep. The Bush White House said nothing, despite being very concerned about smuggling through Dubai.

After his apoplexy over the Dubai Ports sale, New York Senator Chuck Schumer blocked for the airport deal. Schumer's PEU water carrying role continued with his defense of private equity's preferred taxation on carried interest.

Even though they hate taxes, PEU's love to suckle on the government teat. Inchcape hangs on that very bosom.

Watch Inchcape to see which PEU wins.

Update: Carlyle dropped out of bidding for Inchcape. Cinven Group and CVC Capital are the only remaining bidders.

New Jersey's Pension Fund Shouts PEU's

Bloomberg reported:

New Jersey Governor Chris Christie nominated a former partner in the Carlyle Group, the world’s second-largest private-equity firm, and two other financial professionals to a panel overseeing the state’s $68 billion pension fund.

Robert E. Grady worked in venture capital investing at Carlyle before becoming managing director of Denver-based Cheyenne Capital Fund LP in 2009. Grady, who works from Jackson Hole, Wyoming, served as budget adviser to Christie’s transition team.

The New Jersey council sets policy for the 12th largest public pension fund in the U.S. Since 2006, the committee has steered $9.9 billion into alternative investments, including $3 billion in hedge funds, according to the most recent monthly report.

I found this interesting in light of two recent high profile appointments of private equity underwriters (PEU's), Erskine Bowles as co-chair of Obama's Deficit Commission and Fred Malek as head of Virginia's Government Restructuring Commission.

Certainly, PEU expertise is suited to pension investing, but that also carries potential conflicts of interest. Consider the pension fund's 2009 annual report and its PEU language:

The Common Funds are obligated, under certain private equity, real estate and absolute return strategy alternative investment agreements to make additional capital contributions up to contractual levels over the investment period specified for each investment. As of June 30, 2009, the Common Funds had unfunded commitments totaling approximately $7.7 billion.

Private equity comprised $2,982,420,463 of the New Jersey pension's investments as of June 2009. Unfunded commitments bring the total much higher, as much as $10 billion.

The fund's $7.7 billion promise looks like a planned future commitment, but they can be a surprise. PEU's make capital calls. California's public pension fund received $2.8 billion in capital calls in fall 2008.

The fund includes private equity under alternative investments. The description of risks is:

The pension funds’ interests in alternative investments may contain elements of credit, currency and market risk. Such risks include, but are not limited to, limited liquidity, absence of regulatory oversight, dependence upon key individuals, speculative investments (both derivatives and non-marketable investments), and nondisclosure of portfolio composition.

None of those risks change under financial regulatory reform, where private equity has a virtual free pass.

Meanwhile pension funds double down to crank up investment returns. Higher risk means higher reward. Public pensions look like Wall Street before the crash as they crank up "alternative investments." The annual report provides this description:

Alternative investments (private equity, real estate, real asset, and absolute return strategy funds) – estimated fair value provided by the general partner and/or investment manager and reviewed by management. The inputs into the determination of fair value (particularly for private equity and real estate) require significant management judgment or estimation. Because by their very nature, alternative investments are not always readily marketable, their estimated value is subject to uncertainty and therefore may differ significantly from the value that would be used if a ready market for such investments existed. The development of fair value is further complicated by (1) the current lack of liquidity in the financial system and (2) the extreme levels of volatility in the market for public equity in general and for debt securities linked to these asset classes. For these reasons, the realized value received upon the sale of these investments in the open market might be different than the fair value reported in the accompanying financial statements.

Surely, pension fund fence swinging will accrue to the benefit of employees. Returns could eventually trickle down, but New Jersey public workers feel the pain in the interim. Moody's approved of recent changes made to the fund.

Moody's praised the "major pension reform" signed in March — which reduces benefits for future hires and requires current employees to contribute to health care costs — as a step toward repairing the imbalance in the state’s pension system, underfunded by $46 billion as of last June.

The shift to individuals funding health care and retirement continues. Oddly, this is aided by health reform, where employers shed the health benefit to workers and a tapped out Uncle Sam.

Expect Obama's Deficit Commission to continue the dump via the "economy of delayed implementation" and conflicted policy setters. The New Jersey pension story is a fractal in the Government-Corporate Monstrosity, Eisenhower's MIC on steroids. Even Carlyle Group Chairman Emeritus Frank Carlucci revealed the fractal's PEU code.

Update 9-17-10 Grady will chair the State Investment Council and consider a recommendation to allow 43% of public pension investments in alternative investments, hedge funds, private equity, etc.

Update 3-21-11:  Grady called for an allocation review in January, pointing to the pension's cash position.

Update 8-21-11:  Bob Grady encouraged Gov. Christie to run for President. Asbury Park Press reported, "In 2000, Grady left for another plum financial job: the Carlyle Group, one of the world’s largest private equity firms."  Carlyle managed $3.3 billion in assets in 2000, a fraction of today's $153 billion.

Update 4-17-14:  The Grady-Carlyle Group-Christie connection has a bit more sunlight on it, but there's much left in the dark.

PEU's Drive CLO Management Consolidation

Private equity underwriters (PEU's) financed highly leveraged deals from 2005-2007 via collateralized loan obligations. PEU's are buying up billions in CLOs (at a discount) as well as the firms managing the packaged debt securities. StructuredFinanceNews reports:

The Carlyle Group and the New York buyout groups Apollo Global Management, Blackstone Group and Welsh Carson Anderson & Stowe are among the names that have been active in this corner of the structured finance market.

The deals include:

Carlyle purchased $4.2 billion of CLOs and $950 million in managed accounts last week from the New York fixed-income manager Stanfield Capital Partners. In February, Blackstone acquired management agreements for nine CLO and collateralized debt obligation funds valued at $3.1 billion from Callidus Capital Management, a portfolio company of the Washington investment firm Allied Capital Corp. (which Ares Capital Corp. bought last month).

One month earlier, the Guernsey hedge fund Tetragon Financial Group bought Lyon Capital Management of Pittsford, N.Y., and six CLOs worth $2.5 billion from Credit Agricole Group for $10 million.

"Leading private-equity firms are uniquely complementary to credit-management firms. By buying these firms, they can help fund new products and sponsor CLOs," said Ted Gooden, a managing director at the New York investment bank Berkshire Capital Securities, which advised Stanfield on its sale of CLOs to Carlyle.

As buyouts are back in 2010, PEU's can use this new competency to finance their deals.

Citigroup, for example, is marketing ALM Loan Funding 2010-1, a $300 million CLO with triple-A and single-A tranches sponsored by Apollo and scheduled to price in the next two weeks.

Last month, Citi marketed a similar $525 million CLO called Fraser Sullivan for an investment affiliate of buyout group Welsh Carson.

Shadow bankers remain in the dark under financial reform, despite their greed and leverage sins. PEU's have a virtual free pass under the Dodd bill. Private equity will have options for deal financing, BankUnited- a captive bank with billions in FDIC subsidies or internal CLO managers. Let the good times roll.

P.S. Oddly, Highland Capital, the institution mentioned in the graphic, sued The Carlyle Group's LifeCare Hospitals and JP Morgan over their participation in LifeCare's Term B Credit facility. Highland alleged fraud, but the case was dismissed, initially and upon repeal. LifeCare's lawyers have been very busy.

The Fed Sails to Europe's Rescue?

It took 20 months for the Europeans to garner a U.S. sized bailout. The Federal Reserve is helping via currency swaps.

by providing as many dollars as needed

The prior incarnation of the swaps peaked at $583.1 billion in December 2008, with deals encompassing 14 other central banks.

Officials at the Fed saw multiple risks to the U.S. expansion from continued turmoil in Europe, such as crimped trade, declining confidence, and financial volatility.

And the risk from continued unemployment in America on trade, confidence and volatility?

Meanwhile credit derivatives resurface as a destabilizer, instead of the promised stabilizer.

The Fed’s move may pale next to the agreement by the 16 euro nations to offer financial assistance worth as much as 750 billion euros ($971 billion) to countries under attack from speculators.

The tool of speculators, naked credit derivatives, is not reigned in by financial reform. Shadow bankers, high frequency trading and dark pools garner a virtual free pass under the Dodd bill.

Europe's meltdown and the Dow's 1,000 point free fall point to huge holes in financial reform. President Obama can't get a break on the news. Slime continues to spread.