Thursday, September 30, 2010

Losing 1/3 of America's Banks

Federal Reserve Chief Ben Bernanke told teachers that one third of America's banks failed during the Great Depression.  BankUnited CEO John Kanas took that number and projected it into the futureBloomberg reported:

The U.S. may lose about a third of its banks as the weakening economy weeds out the least healthy institutions, said John Kanas, chief executive officer of BankUnited. “Most of us in the business think we probably need 5,000 and think we are on our way to 5,000 as this cycle, if this is a cycle, unfolds,” Kanas, 63, said today at the Bloomberg Dealmakers Summit in New York. 
BankUnited's owners, The Carlyle Group, Wilbur Ross, Blackstone Group and Centerbridge Capital, were out in force at the Dealmakers Summit   Kanas went on to say:

"It’s not as easy as it once was when the market was going straight up and real estate values were on a straight incline,” Kanas said. “It will require people with greater experience levels and with tougher attitude toward the industry to carve out a future in this business.”

That and $4.9 billion in FDIC loss sharing subsidies.  It helps when public institutions recapitalize your bank.

Update:   GulfNews reported the FDIC's list of "problem" banks climbed to 829 lenders with $403 billion in assets at the end of the second quarter, a 7 per cent increase from the 775 on the list in the first quarter.

Rubenstein Welcome in China

The WSJ & EPJ reported the words of Carlyle Group co-founder David Rubenstein, who spoke during the Dow Jones Private Equity Analyst Conference in New York.:

“China encourages private equity investment more than any other country in the world right now.”

“I feel more welcome there than in the halls of Congress.”

Rubenstein lost Congressional host Rep. Rahm Emanuel. He stands to lose another with Senator Evan Bayh’s retirement.

China understands substitution for profit growth.  They have no problems with firms making 30% annual returns on the back of taxpayers.  Most important, the Chinese understand huilu, baksheesh, payola.  Carlyle and the Chinese know these things. 

Carlyle Group's Rubenstein Sells Lower PEU Fees

Bloomberg reported:

David Rubenstein, co-founder of the Carlyle Group, said that private equity firms are lowering their fees in the wake of the 2008 market crash.

Buyout firms such as Carlyle have traditionally charged clients a 2 percent fee on committed capital and an incentive fee that equals 20 percent of investment profits. As fundraising becomes more difficult, buyout firms are cutting management fees, Rubenstein said today at the Bloomberg Dealmaker Summit in New York.

“I’m not sure anybody really gets 2 and 20 anymore,” said Rubenstein. Large buyout funds now probably charge management fees of 1 percent to 1.25 percent, he said.

Despite that assessment, the 20% carry remains intact.

Most private-equity clients support the payment of a 20 percent profit participation, also known as the carry, because they want to encourage managers to make money.

The carry has been very good to Carlyle's DBD Investors V.  From two deals, the sale of Vought Aircraft Industries and CoreSite Realty's IPO, founders hold $744 million in stock.

Carlyle has invested about $65 billion of equity since its founding in 1987, Rubinstein said, adding that the firm’s internal rate of return has averaged 30 percent annually since then. After fees are deducted, Carlyle’s annual returns have averaged 25 percent.
It's hard to keep track of Carlyle's many affiliates.  The next natural supplement you take could fuel Carlyle 30% annual returns over a 23 year period.  That sounds unnatural, almost Bernie Madoff like.  Carlyle has been known to plead puffery.

Wednesday, September 29, 2010

DBD Investors V: The Fattening

The Carlyle Group's three leaders, David Rubenstein, Bill Conway and Daniel D'Aniello, are known within the firm as "DBD."  Their DBD Investors V, LLC is flush with resources.  SEC filings show.

9-28-10  Coresite Realty--roughly 25.3 million shares, valued at $408 million
8-5-10 Triumph Group--over 5 million shares, valued at $336 million

DBD Investors V is having a very good year.  It reflects a tiny part of The Carlyle Group's great cash in.  This data calls into question Fortune's estimate for the DBD's.

Tuesday, September 28, 2010

B&B: One Carlyle Buyout, Two Future IPO's

FT reported:

Carlyle plans to split B&B into an operating company owned by its buy-out fund and a property company backed by its real estate fund, and aims to expand by opening new budget hotels in Germany, France, Italy and the Netherlands.
The Carlyle Group did this with Coresite, a data center provider.  Coresite Realty became Carlyle's best priced IPO year to date.  Despite pricing in the mid-range at $16, the stock closed today at $15.98.

Rumors had Carlyle enacting a similar strategy with Healthscope, the Australian hospital chain.  It already spun off ManorCare's nursing home facilities from operations.  Commercial mortgage backed security obligations likely prevent a strategy for ManorCare, at least in the short term.  

PEU's Mostly Ignore Chinese Tax

Compliance Week reported:

Chinese tax authorities surprised Western companies last December with a new tax law aimed squarely at a standard legal mechanism to do business in China, the offshore holding company.

Deals (sales between offshore holding companies) that were once simple and tax-free must now be logged with Chinese authorities—and any gains could be taxed at a 10 percent rate.

Companies have found a surprisingly successful—yet potentially risky—strategy to comply with the law: pretend it’s not there. 
The Carlyle Group paid $25 million on gains in the sale of Yangzhou Chengde Steel Tube.  The Chinese drafted the law in December 2009.  It's retroactive to January 1, 2008. 

Oddly, this lack of clarity hasn't impeded private equity underwriter's (PEU's) China aspirations.  PEU's understand the need for huilu, baksheesh, payola.

Monday, September 27, 2010

PEU's $600 Billion in Dry Powder

Private equity underwriters (PEU'S) have $600 billion in cash, partly from recent debt offerings but mostly from monetizing affiliates via IPO's or outright sales.  They may put that money to work in non-PEU segments of the shadow banking system, hedge funds and/or proprietary trading desks.  The "Great PEU Cash In" generated billions to buy financial cash cows.

Sunday, September 26, 2010

Blackstone Group: Chinese Milk & British Biscuits

WSJ Asia reported:

Shanghai-based Bright Food (Group) Co. is in exclusive talks about a possible purchase of British snacks and cookies maker United Biscuits (Holdings) Ltd., people familiar with the matter said Sunday.

One of the people said the acquisition, if it goes ahead, would be valued at more than £2 billion, or about $3 billion. United Biscuits' current owners, U.S. private equity-firm Blackstone Group LP and French private-equity firm PAI Partners, paid £1.6 billion for the company four years ago. Britain's Sunday Times reported the talks first.
This could be China putting its foreign currency holdings to work before they hyper-inflate.  Goldman Sachs and JP Morgan are advising Blackstone/PAI.  Did they identify operational synergies between Bright Foods and United Biscuit, which involve new markets or changing United Biscuits' suppliers?

Bright Food has a toxic track record, at least in their dairy division.  Bright's dairy group delivered melamine tainted milk to the public

Radio Free Asia reported on the toxic milk outbreak in September 2008.  It called mixing melamine with watered-down milk "a common practice," at least since April 2005.

Investigators found melamine in milk products from 22 dairies and manufacturers, the official Xinhua news agency said. The companies include the Megniu Group, Bright Dairy & Food and the Yili Industrial Group. At least a dozen countries in Asia and Africa have been affected by tainted Chinese exports, the Reuters news agency said.
Consider the reasons for manufacturers and their suppliers to substitute cheaper ingredients, as noted by a professor from Ohio State University.

"There is relentless pressure now to contain costs," he said. "You have unfettered competition and growing price pressures, and therefore the pressure to cut corners is always there, and you cut corners by using ingredients you're not supposed to."

Who supplied that pressure?  In the case of China, it was heavy handed corporate executives and free wheeling suppliers.  Chinese regulators kept the lid on problems as the Summer Olympics neared.  After the scandal broke, the Chinese government provided an interest subsidy to dairies, many of which sold out to private equity underwriters (PEU's) firms

PEU's supply similar pressure.  They're relentless in growing profits and flipping affiliates for multiples of their original investment.  The Carlyle Group invested in one Chinese toxic milk offender, Yashili Group. It's ready to cash in, while dancing around the melamine issue.

While Blackstone looks to monetize United Biscuits, what assurances will they give the public that cookies will remain safe?  Will our children look back to the time even milk and cookies required buyer beware?

Update 11-30-14:  PEU owners pulled £34 million from United Biscuit, for their greed and sheer pleasure.

Saturday, September 25, 2010

Uncle Sam: King of the Guarantor World

Two years after the financial crisis, the federal government guaranteed $30 to $35 billion in bonds to save credit unions.  WSJ reported:

Regulators announced Friday a rescue and revamping of the nation's wholesale credit union system, underpinned by a federal guarantee valued at $30 billion or more.

Friday's moves include the seizure of three wholesale credit unions, plus an unusual plan by government officials to manage $50 billion of troubled assets inherited from failed institutions. To help fund the rescue, the National Credit Union Administration plans to issue $30 billion to $35 billion in government-guaranteed bonds, backed by the shaky mortgage-related assets.
Backed by shaky mortgage-related assets?  Which of $3.7 trillion in government programs was supposed to help with mortgage related assets, TARP, PPIP, HAMP or any other acronym jumble?   Here's the federal take:

"Previously, we stabilized the system, and now we're resolving the problem and reforming the system," said Debbie Matz, chairman of the National Credit Union Administration, the U.S. agency overseeing credit unions.

Nice try, Debbie.  Fifty billion in troubled assets, it sounds like we're still at the stabilization phase. Uncle Sam might be the only functioning lender, given $30 billion for credit unions, another $30 billion for small businesses, and $50 billion in GM.  This is while banks fail at a record rate.  It remains to be seen if the program costs taxpayers anything.

Mubadala on BP Assets

The Carlyle Group is part owned by Mubadala Development Co, a United Arab Emirates sovereign wealth firm. While Mubadala is diversified, the majority of its businesses are energy related.  The Carlyle Group has an energy joint venture, Riverstone Holdings.  Technically, Mubadala owns part of Riverstone.

Zawya reported:

In August, David Douglas, senior vice president at Mubadala's oil and gas unit, told Zawya Dow Jones that the firm will look at BP PLC assets going on sale.
David Douglas can call an ex-BP CEO for consultation.  Lord John Browne is a managing director at Riverstone Holdings.  Lord Browne mentored Robert "Turtle" Dudley, BP's new CEO.  Browne's top assistants were nicknamed "Turtles", after the Teenage Mutant Ninja Turtles.  Surely, Dudley would take a call from the good Lord.

Who knows if Mubadala will seek Lord Browne's advice on what BP assets to buy?  The point is they can.  

Zawya indicated Mubadala has more on their plate.  Mubadala has a potential bond sale before the end of the year.  It also plans to become a top 10 shareholder in GE, currently holding roughly 76 million shares.  Mubadala & GE have an $8 billion commercial finance joint venture based out of Abu Dhabi.  Let's hope it doesn't do a Dubai.

Friday, September 24, 2010

McKechnie to Change Hands this Week?

McKechnie Aerospace has three bidders, The Carlyle Group, Precision Castparts and TransDigm Group.  Carlyle is a private equity underwriter (PEU) while the other two firms are aircraft component makers.  It's not clear what happened to Blackstone or GS Capital Partners.  A sale could be announced as soon as next week.

Bloomberg reported:

McKechnie makes fasteners, latches and valves for aircraft, including those built by Boeing Co. and Airbus SAS. The world’s two biggest planemakers are boosting output to records starting next year as airlines recover from the recession and seek newer, more fuel-efficient jets to refresh and expand their fleets. They’re also trying to cut costs and streamline partnerships with vendors as they develop new models.

Carlyle has a history with Boeing via affiliate Vought Aircraft Aviation.  Boeing worked with Vought on the 787 Dreamliner, but the supplier gunked up the production line.  Vought CEO Elmer Doty blamed an "internal liquidity crisis" for problems getting production lines up and running. This was when Carlyle was flush with cash and had millions in grant money from Texas and South Carolina.

Boeing eventually bought out a Vought joint venture and Vought's South Carolina Dreamliner production division.  McKechnie's owners may want to conduct due diligence, but it's Morgan Stanley and JLL, a fellow PEU.  I believe their sole requirement is check that doesn't bounce..

Update:  TransDigm won McKechnie with a $1.27 billion bid.

Gaming Shadow Boys

March 2009--Military and intelligence officials conduct an exercise on economic conflict with China.  America loses badly.

Eric Weiner, author of The Shadow Market, states:

“The shadow market is a collection of unaffiliated, extremely wealthy nations and investors that effectively run the international economy through their prodigious holdings of stocks, bonds, real estate, currencies, and other financial instruments.” 
Bloomberg writes about the book:

What we’re witnessing, of course, is mercantilism in the Internet age. The wealth of these nations slithers through the digital depths and surfaces around the globe as purchases of land, commodities and securities.

Though hedge funds and private-equity funds participate in this plot to “secretly dominate the world” (as the conspiratorial subtitle puts it), Weiner focuses on sovereign wealth funds and government-owned holding companies that are buying swaths of the planet, parcel by parcel.

Conspicuously absent from financial reform, any mention of sovereign wealth funds.  Private equity underwriters got a virtual free pass in the bill.  The bill passed in May 2010.

Ironically, Weiner writes about the freeing of the Lockerbie bomber, a frequent topic of this author.

“The groups with access to capital and natural resources hold the power,” he writes. “And everyone else is just a pawn in a much larger chess match going on above their heads.” 

Capital is coming from nation states, those flush with cash or issuing debt out the wazoo.  It makes its way to the politically connected.   Wilbur Ross, David Rubenstein, Lord John Browne, Pete Peterson, Stephen Schwarzman, Bob Johnson, ... the list is long.

Carlyle Group Sells FRSGlobal

FRSGlobal is the latest monetization in The Carlyle Group's great cash in.  Carlyle sold FRSGlobal to Wolters Kluwer Financial Services.  Terms were not disclosed.

Volcker's Rant

Former Fed Chief Paul Volcker scrapped his speech to rail on the financial system.  His points include:

“I’ve heard so many stories about how important” derivatives are but “there doesn’t seem to be much doubt that the creation of derivatives has far exceeded any pressing need for hedging.”

"Normal distribution curves — if I would submit to you — do not exist in financial markets."

“It’s so difficult to get out of this recession because of the basic disequilibrium in the real economy.”

“The financial system is broken. We can use that term in late 2008, and I think it’s fair to still use the term unfortunately. We know that parts of it are absolutely broken, like the mortgage market which only happens to be the most important part of our capital markets [and has] become a subsidiary of the U.S. government.”

Uncle Sam remains the candy distributor for Wall Street and shadow bankers.  Their lobbyists and owned politicians ensure the government-supported financial franchise remains intact.

Thursday, September 23, 2010

Forbes "Red Arrowed" David Rubenstein

Carlyle Group co-founder David Rubenstein saw his net worth drop, according to Forbes.  In six months Rubenstein fell from $2.5 billion to $2 billion.  This occurred despite Carlyle's spate of cash ins, which typically generate huge profits for the most senior members of private equity firms.

The only affiliate to fail since March was Oriental Trading.  It didn't impact the assets under management number Carlyle publishes.  For a recap of Rubenstein's Forbes net worth estimates (pictured at the top of this post):

2007 $2.5 billion
2008 $2.7 billion
2009 $1.4 billion
2010 $2.5 billion (March)

2010 $2.0 billion (September)

I don't see him holding or taking home less, not in the last six months of 2010.  Maybe, Mr. Rubenstein gave more of it away.

PEU Independent Public Offerings

The IPO market has a large backlog according to Bloomberg:

IPOs on the New York Stock Exchange and the Nasdaq Stock Market have raised $19.1 billion in 2010, while companies from Nielsen Holdings BV and Demand Media Inc. to General Motors Co. filed with the Securities and Exchange Commission to sell $48.9 billion in shares, according to data compiled by Bloomberg. That’s the widest gap since at least 1999, the data show.

What's come to market hasn't generated a big windfall for investors.

More than half the companies that submitted plans for IPOs in 2010 have yet to complete them after 61 percent of this year’s offerings left buyers with losses.

Also, they haven't been as lucrative as hoped.

While 68 percent of the deals raised less than sought, private equity funds and venture capital firms are still seeking to sell holdings after the financial crisis blocked them from exiting investments.

Private equity underwriter (PEU) IPO's haven't been as popular as hoped.

The number of IPOs that have yet to be completed has grown 81 percent from a year ago as investors shunned offerings backed by private equity firms, which take controlling stakes in companies and use borrowed money to finance most of the acquisition.

The 19 initial sales from U.S. companies led by LBO firms have lost 1.9 percent of their value in the first month of trading in 2010, after averaging gains every year since at least 2001, data compiled by Bloomberg and Renaissance show.

“There’s a lot of private equity funds trying to sell companies to show people that the LBO model isn’t broken,” said Charles Bobrinskoy, vice chairman at Chicago-based Ariel Investments LLC, which oversees about $5 billion.

The Carlyle Group's great cash in continued with CoreSite Realty. CoreSite went public in the middle of the range and was higher in early trading. Yet, their $2 billion Nielsen IPO awaits with no date.

Wednesday, September 22, 2010

Carlyle to Recycle Shanks Bid?

Fresh off a third place finish in the race for Pittsburgh's parking concession, The Carlyle Group might literally be down in the dumps. Rumors have Carlyle re-courting European trash handler Shanks. Shanks has had plenty of time to investigate the politically connected private equity underwriter (PEU). The pair could well deserve one another.

Pittsburgh Parking Follows Chicago

Pittsburgh will lease its parking garages and meters for $452 million. Quick cash is needed to save the city's ailing pension fund. The city was advised by Morgan Stanley. The Post-Gazette reported on the bid process:

The J.P. Morgan-LAZ team offered $413 million, while EQT Partners and The Carlyle Group bid $391.5 million and $311 million, respectively. Because the two highest bids were within 10 percent of each other, the city ordered a runoff process that culminated Monday with bids of $451.7 million from the J.P. Morgan-LAZ team and $423.1 million from EQT.

The (winning) bidder is operating as Pittsburgh Parking Partners LLC, which described itself in a statement Tuesday as a consortium of "institutional investors" advised by J.P. Morgan and LAZ affiliate P4 Partners.

Pittsburgh Parking spokeswoman Shannon Baker declined to identify the investors, except to say in an e-mail that they're entities such as "government and corporate pension plans, insurance companies, endowments and foundations."
Mayor Luke Ravenstahl stated $200 million of the proceeds would go into the pension fund. However, Controller Lamb has a different take:
"We would realize well over $1 billion if we continued to operate the garages on our own," he said, particularly if the city followed the parking rate increases that Mr. Ravenstahl has proposed as part of the lease plan.
Parking rate increases? That leads to Chicago's experience with LAZ Parking. The first came in 2006, a 99 year lease of parking garages with 9,178 spaces (Chicago Downtown Public Parking System):

Morgan Stanley and LAZ Parking have won the bidding for four underground parking garages in Chicago. It will pay $563 million to the City of Chicago for a 99-year lease on the garages, located on Michigan Avenue in the centre of the city.
Next came 36,000 parking meters (Chicago Metered Parking System), a 75 year lease for $1.15 billion. Allianz Capital Partners, a unit of Munich-based Allianz SE and the Abu Dhabi Investment Authority are partners with New York-based Morgan Stanley in the leasing consortium, called Chicago Parking Meters Venture LLC.

LAZ Parking, LLC is pleased to announce that a consortium led by Morgan Stanley's infrastructure investment group has been selected by the City of Chicago as the preferred bidder for the 75-year concession of the Chicago Metered Parking System.

LAZ Parking, headquartered in Hartford, will be responsible for the operation of the system. The Metered Parking System has up to 45,000 parking meters, together with surface parking lots, throughout downtown Chicago. The City retains all power and authority to set rates and periods of stay and operation for all of the parking meters in the System.
So what happened to metered rates? They went from 25 cents an hour to $1, then jumped in increments to $1.25, $1.50 in 2011, and $2 by 2013. Inside the loop rates are $4.25 an hour, but they'll hit $6.50 by 2013. Central business district parking costs $2.50 an hour. Sundays and evenings are no longer free. After 2013 rates will continue rising.

Chicago officials said that after the first five years of the 75-year parking meter lease, rate hikes will be subject to approval by alderman and are expected to be at the rate of inflation.

Cities seem to rush parking deals through, intent on a one time cash injection while sacrificing a long term revenue stream. Chicago Mayor Daley rammed his deal through in 48 hours.

The Windy City reaped nearly $2 billion between 2006 and 2008 in such deals. How were those proceeds used? Here's the promise:

The Daley administration said $400 million will go into a long-term reserve, $325 million will be spent in city budgets through 2012 and $100 million is earmarked for programs helping low-income people. An additional $324 million is headed toward a fund city officials said "may be used to help bridge the period until the nation's economy begins to grow again."
The current status of the proceeds:

Daley spent about $792 million of the lease money in the last three years to balance budgets and for other needs, according to city reports including one from Saffold. That would leave $353 million of the upfront payment to put toward the 2011 budget, which is expected to have a $654.7 million deficit, according to estimates issued July 30.
The city will use 75 years of revenue in four short years. Amazing. On the flip side of the contract Morgan Stanley's long term take is $11.6 billion, over double the original estimate of $4 to 5 billion. Chicago is being sued for selling the meter franchise on the cheap. Bloomberg reported:

“The city was paid, conservatively, $974 million less for this 75-year lease than the city would have received” from the revenue generated by its 36,000 meters during that time, Bunting said, citing a 2009 report by the city’s inspector general.

In his report, then-Inspector General David Hoffman faulted the city for moving too quickly to approve the long-term lease and for failing to examine other alternatives.

Pittsburgh is in a hurry to shore up their pension fund by leasing parking to investors, comprised of other pension funds. Where will this interconnectedness land already stressed public pensions, cranking up risk for returns? Governments are stressed general contractors, selling their very lifeblood.

Stressed pensions and governments bode well for private equity underwriters (PEU's). While The Carlyle Group lost Pittsburgh parking, they'll get their turn to collect meter money..

Update:  Pittsburgh's City Council killed the parking privatization deal on 10-19-10.  An Indianapolis deal remains on the table.  Rates could go up 1,000 percent.

Update 11-22-10:  Pittsburgh Mayor Luke Ravenstahl may take another run at parking privatization to fund the city's pension.

Update 5-3-14: Chicago parking had another banner year with revenues of $135.6 million, up from $23.8 million in 2008 (the last year the city held the franchise)

Tuesday, September 21, 2010

Carlyle's Chinese Seafood Investment

Corporate Treasury News reported:

Dennis Chan looked excited. The financial controller of Pacific Andes International Holdings, a Hong Kong-listed global seafood conglomerate, had just closed a $190 million private placement with The Carlyle Group to fund expansion – the latest in the company’s plans to grow.

“The investment will allow the entire group to expand,” he said. “We are targeting expanding our fishing rights in Peru and in Africa – all over really.”

Pacific Andes has grown rapidly during the past decade, reporting a compound annual growth rate of 21% since 2000, as it acquired and built up operations ranging from fishing, packaging to distribution around the world.

Pacific Andes has China Fishery as a subsidiary corporation. Carlyle's recent investment went through China Fishery. A Pacific Andes press release stated:

In July 2010, China Fishery completed a private placement of 113.5 million new shares and 26.7 million warrants to The Carlyle Group. The gross proceeds of US$150 million (HK$1,170 million) will be used primarily for strategic acquisitions and to acquire additional fishing quota.

The deal combined the largest private equity underwriter (PEU) with "the world’s largest fishing group, the largest supplier of frozen fish and the world’s largest fish fillet producer."

As it will soon own NBTY, the huge vitamin/supplement maker, The Carlyle Group can double ring the register on your next fish oil tablet.

Monday, September 20, 2010

The Carlyle Group's PEU Soiree

WaPo reported:
District-based Carlyle Group held its annual investor meeting at the Ritz-Carlton in D.C.'s West End last week.A decidedly international crowd of 900 well-heeled individuals and pension fund reps crowded the Ritz's main ballroom to learn how the $90.6 billion that Carlyle manages is faring. 

Private equity underwriter (PEU) Carlyle told a familiar story. American affiliates grew revenues and profit, while paying down debt with the same number of employees.
The crowd heard from former secretaries of state Colin Powell and Madeleine Albright, "Meet the Press" host David Gregory and political wag Bill Kristol, as well as former Treasury secretaries Robert Rubin and Hank Paulson.

In other words, PEU's Colin Powell (Kleiner Perkins) and Bob Rubin (Centerview Partners) addressed their peers seeking 30% annual returns.

Madeline has her own investment fund, Albright Capital Management, LLC Despite serving as Chair of the $329 million fund, somehow Madeline's not listed in their SEC filings. Albright Capital Management's specialty is emerging markets, i.e. growing jobs outside America. Madeline Albright will be forever remembered for seeking justice on the backs of 500,000 Iraqi children, much like Carlyle's grinding of employees to power their greed machine.  Both wear serpent pins with pride.

Hank Paulson finally got rid of rival Lehman Brothers as Treasury Secretary. It was too politically risky to save W's relations Jeb Bush and George Herbert Walker in the months before the 2008 Presidential election.

David Gregory couldn't recognize a story if it served him Dover Sole alongside Queen Elizabeth.

Carlyle's 900 investors were treated to the sounds of Chicago.
The classic rock band Chicago, long in the tooth but still standing, got the crowd almost as pumped up as their hopes of high returns on their investments.

Did they rewrite the words to "Make Me Smile"?
Carlyle plays in the dark. But who knows.
We're so happy
For carried interest
Profit is lovely
When you monetize
Tell me you will pay
Make me smile

When will the PEU 900 meet again? Maybe the next Clinton Global Initiative gathering.

Will Chicago play at the next Bilderberg meeting? Maybe PEU's Bono or Bob Geldorf will have the gig. Pandora's box clearly has been opened.

Update:  This quote came from the Clinton Global Initiative meeting.  "I don't think people really care about their grandkids, actually. We're too self-centered for that. I think maybe people care about their kids, but that’s about as far as they go."

Saturday, September 18, 2010

GM to Leave America's Sovereign Debt Fund for SWF's?

The American government, deep in hock, owns 60% of General Motors. GM plans an independent public offering (IPO) under the new leadership of Daniel Akerson, formerly of The Carlyle Group. Carlyle is part owned by CalPERS, a pension fund, and Mubadala Investment Company, a sovereign wealth fund from the United Arab Emirates.

Reuters reported international interest in GM's upcoming IPO. China's state owned car company, SAIC, wants a single digit ownership stake in GM. SAIC and GM have a 13 year relationship. Other "cornerstone investors" could include state owned sovereign wealth funds (SWF), many fueled by oil money. Ackerson is using his SWF contacts to line up investment sales meetings.

America's sovereign debt fund pumped $49.5 billion into GM, producing the nickname "Government Motors." The IPO could turn that into "International Government Motors (IGM)." What if public pension funds buy big in the IPO? Would "Pension Motors" sound any better?

Thursday, September 16, 2010

Carlyle Group's New Wave: Hedge Funds

The Carlyle Group is exploring hedge funds. It's Blue Wave Partners hedge fund failed in 2008 prior to the financial implosion. A former Blue Wave employee was on the Democratic primary ballot in New York.

Bloomberg reported:

The renewed push into hedge funds and more liquid investments may help Carlyle should it decide to sell shares in an initial public offering, said Daniel Fannon, a San Francisco- based analyst at Jefferies & Co.
I don't know where Bloomberg's writers find a "buyout slump." Private equity underwriters, like Carlyle, are monetizing affiliates left and right. Using hedge funds to monetize Carlyle is no surprise, not given Carlyle co-founder David Rubenstein's McKinsey interview. The three co-founders, also known as DBD investors, will try to cash in at the apex, like Blackstone's Pete Peterson.

Guess who's ready to roll the dice in hedge funds? Public pensions in California and New Jersey. Carlyle's David Rubenstein can read the leaves, when he's not growing them.

Wednesday, September 15, 2010

BlackRock's Dealbook

NYT Dealbook had two stories dealing with BlackRock, but only one mentioned the firm by name. The first story dealt with Stuyvesant Town, a huge housing complex in New York.

The partnership that bought the complexes in 2006 for a record $5.4 billion defaulted on a $3 billion senior mortgage in January and $1.4 billion in secondary loans.

BlackRock was part of the partnership that bailed on Peter Cooper Village and Stuyvesant Town, sticking it to struggling Fannie Mae and Freddie Mac. After welshing on a $3 billion mortgage, BlackRock is rumored to have bid on ResCap, GMAC's mortgage finance business. Nice.

How much of ResCap will Uncle Sam eat so BlackRock can profit?

Update 9-17-10 Bloomberg mentioned BlackRock's role in Peter Cooper/Stuyvesant Town. It noted Wilbur Ross's possible interest in the properties. Like most financial vultures, Ross prefers deals with federal subsidies.

Wilbur Ross & Carlyle Group Win Bid for EBS

Wilbur Ross told the WSJ he is confident that his consortium will win Irish banker, EBS Building Society. Ross joined The Carlyle Group and Cardinal Capital in making the bid. This would make Ross' fourth bank.

He and Carlyle own part of BankUnited, which received a $4.9 billion loss sharing subsidy from the FDIC. Ross and Carlyle already plan to monetize BankUnited via an upcoming IPO. Where others see risk, Wilbur sees gold. When Ross talks capitalism, one finds subsidy.

Update 9-16-10 Ross dangled fruit to Irish mortgage holders. However, it might be poisoned.

Update 2-12-2011:  Ross says EBS may close by March. Meanwhile, America's FDIC keeps funneling cash to Ross affiliated bank investments.


Pension giant CalPERS will roll the dice to generate returns. Yes, high risk/high return is a "hair of the dog" strategy. Bloomberg reported:

Calpers made a series of disastrous bets on real estate after letting its internal risk controls break down and ceding too much control to outside investment advisers during the housing bubble.

Calpers’s unfunded liabilities amounted to $240 billion as of 2008, leaving it with only half of the assets it needs to make its required payouts, according to a Stanford University study released in April.

On top of the fiscal mess, Calpers is also caught up in a corruption scandal involving middlemen who help money managers win investing assignments from pension funds.
Oddly, CalPERS risk chase puts them in the same boat as private equity underwriters (PEU's). PEU's paid middlemen to steer pension investments to their fund offerings.

CalPERS investment shift got different reactions:

“It’s folly to think a $200 billion pension fund is going to do better than the economy,” says Rowe, chairman of Greenbrier Capital Partners Ltd., a Dallas-based investment firm. “To move out on the risk spectrum to beat the market is imprudent; it’s like running your retirement from Las Vegas.”

“The whole model of asset allocation is being reviewed by investors,” says Laurence Fink, whose firm (BlackRock) manages $1 billion in assets for Calpers. “The world is moving toward global investing with multiple products, and Joe is adapting Calpers to that model -- and I don’t think this is way out there. This is mainstream thought today.”
How is it "mainstream thought" when one can't tell the difference between a pension fund and shadow bankers, like hedge funds and private equity underwriters?

PEU's are known for leeching off Uncle Sam and CalPERS is no different. They expect $200 million in reimbursement under the Early Retiree Reinsurance Program (ERRP). That's just the tip of federal backstopping should CalPERS risky ventures fail. There's the Pension Benefit Guaranty Corporation. They rescue pensions from the death spiral.

Tuesday, September 14, 2010

PEU Council Adds Consonants

The Private Equity Council added members and letters to their greed oriented trade group. They are now the Private Equity Growth Capital Council (PEGCC). It rolls off the tongue in vomit like fashion.

I offer the following mnemonic (memory aid). Picture your head over a trash can (or toilet). From deep in your gut, you're feeling queasy. Here it comes:

Peuuu, gh, ch, ch = PEGCC
Joining the council are:

Welsh, Carson, Anderson & Stowe- Tom Scully
Crestview Partners- Bob Rubin
MidOcean Partners- George Pataki
GTCR- connected to Rahm Emanuel

Membership is up to 30 private equity underwriters (PEU's). The group that has been slashing jobs and benefits wants to become even less of a household name. It's called reverse branding, at least for the general public.

Political officials know PEGCC well. Their best friends are PEU's and many hope for high paying employment after public service. Watch where Peter Orszag, Evan Bayh and Chris Dodd land.

Update:  Peter Orszag landed at Citigroup, with a $2 to $3 million pay package.  Evan Bayh is now Senior Advisor for Public Policy for Apollo Global Management, which briefly had Tom Daschle.   Only Chris Dodd remains free to catch.  He'll be tough to land, given Dodd's slippery-ness.

Update 3-30-11:  Chris Dodd is the CEO and Chairman of the Motion Picture Association of America, Inc. (MPAA), which has a number of PEU connections.  The question is how Dodd will get Congress to subsidize movie making or enforce their franchise.  

Update 8-1-23:  Chris Dodd is a Senior Advisor for Teneo. 

Tylenol Past & Present

Johnson & Johnson's McNeil division has a history with removing dangerous Tylenol from the shelves. Flash back to fall 1982:

Wednesday, September 29, 1982--seven people in the Chicago area ingested cyanide laced Extra Strength Tylenol capsules. All died, three of the seven were in the same household. A hospital nurse made the connection based on those three deaths. She went with the police to the home, found the Tylenol bottle and counted out the remaining pills. Six were gone, three adults-two pills apiece, all dead. She sounded the alarm. The media picked it up.

Thursday, September 30--Johnson & Johnson executives learn of the poisonings. It’s estimated 200 million Extra Strength Tylenol capsules were on the shelf or in distribution centers. CEO James Burke started his legendary crisis management effort. He sent the McNeil Consumer Products Chairman to their plant in Fort Washington, Pennsylvania. He formed an Executive Strategy Group, which met twice a day to make decisions on the rapidly developing situation. Based on the bottle lot number, Tylenol recalled 4.7 million capsules.

Friday, October 1--J&J recalled another 8.5 million capsules from their Round Rock, TX plant. McNeil officials urged consumers across the country to discontinue using the capsules pending further investigation. They posted a $100,000 reward for information leading to the arrest and conviction of the person or persons responsible for tampering with the drug. McNeil set up a telephone number with recorded information and another number to call for answers to further questions.

Monday, October 4--J&J announced it halted Tylenol production and advertising.

Tuesday, October 5-J&J recalled all Tylenol products, an estimated 31 million bottles at a cost of $100 million. That happened within a week of the deaths.

What message did the customer get? If J&J can’t sell a safe product, they won’t sell anything.

What happened? At the time of the scare Tylenol’s market share collapsed from 35% to 8%. It rebounded in less than a year, a move credited to J&J's prompt and aggressive reaction. In November, it reintroduced capsules but in a new, triple-sealed package, coupled with heavy price promotions and within several years, Tylenol had become the most popular over-the-counter pain medicine in the US.

Flash forward to the present state of Tylenol, McNeil and Johnson & Johnson. Consider the spate of recalls in the last year:

Recall #1 September 2009--J&J recalled liquid Children’s and Infants’ Tylenol Products due to “an unused portion of one inactive ingredient not meeting all quality standards.” The recall covered 21 products and 57 production lots.

Recall #2 November--The company recalled five lots of its Tylenol Arthritis Pain 100 count with the red EZ-open cap due to reports of an unusual moldy, musty, or mildew-like odor that led to some cases of nausea, stomach pain, vomiting and diarrhea.

Recall #3 December--McNeil expanded that recall to include all available product lots of Tylenol Arthritis Pain caplet 100 count bottles with the red EZ-open cap.

Tylenol conducted three official recalls in 2009 and an unofficial one. In summer 2009 contractors hired by J&J carried out a scheme to secretly recall damaged Motrin by going store by store and quietly buying every packet. Moving on.

Recall #4 January 15, 2010--McNeil recalled an undisclosed number of containers of Tylenol, Motrin and other over-the-counter drugs after consumers complained of feeling sick from an "unusual" odor. The list of recalled products is 15 pages long. The public story is a chemical got transferred to the product from wooden pallets.

Recall #5 April 30--McNeil recalled some 50 children's versions of non-prescription drugs (136 million bottles), including Tylenol, Motrin and Benadryl. Johnson & Johnson suspended production at the Fort Washington, Pennsylvania plant.

The FDA detailed dusty and filthy conditions at the plant, including "incubators with a large amount of visible gray and brown dust/debris, a large hole in the ceiling and thick dust covering the grill inside a filtered cabinet."

In addition, the FDA said some drums used to transport raw materials to the Fort Washington facility were contaminated with a bacteria identified as B. cepacia. It’s dangerous to people with weak immune systems. However, no bacteria was found in the final product.

McNeil failed to follow up on 46 consumer complaints received from June 2009 to April 2010 "regarding foreign materials, black or dark specks."

The FDA stated the plant "does not maintain adequate laboratory facilities for the testing and approval (or rejection) of components of drug products." (CNN)

These FDA findings are serious. They speak to problems with suppliers and processes.

May 4—-J&J said it is working in close consultation with the FDA.

May 27--Congress held a hearing on the recalls. CEO William Weldon sent Colleen Goggins, Chief of J & J’s consumer products division to testify. Fortune stated: “Goggins's approach -- one part apology and promise to do better to three parts disclaimer and evasion -- embodies J&J's recipe for addressing the crisis. The company has been less than forthcoming about the Motrin recall, which it still defends, and was rebuked by a Congressman for failing to respond quickly to requests for information. "At every step in this process J&J has not been transparent," says Don Riker, a consultant to OTC drug companies. "Every bit of information is cagey, secretive, and micromanaged."

June 24—J&J said in a press release: “it does not anticipate having sources of supply before the end of 2010 for most of the products that were produced at its Fort Washington manufacturing facility.

Recall #6 July 8-—J&J recalled 21 lots of over-the-counter medicines as follow up to its January recall.

July 9--J&J was sued by US consumers for fraud and racketeering. The suit demands cash compensation for recalled children’s cold and allergy medicines. The four cases were brought in the Northern District Court of Illinois, Chicago. (Bloomberg) There’s irony in the case being brought in Chicago, the site of the 1982 Tylenol poisonings.

September 5--Financial Times interviewed J&J CEO William Weldon.

September 9--Weldon went on CNBC, speaking with Maria Bartiromo

Nearly a year after the first official recall, Weldon talked solutions. They closed the Fort Washington plant, laid off 300 workers, and replaced a number of senior executives. Weldon established an executive position responsible for J&J's supply chain. The position reports directly to him. J&J expects a loss of $600 million in revenue due to the recalls.

Reading between the lines, J&J has major supplier quality problems. They faced other significant problems, according to Fortune magazine. Consider the stories revealed in a series of articles:

1. CEO William Weldon stayed behind closed doors, granting interviews only in the last few weeks. Weldon became CEO in 2002. His leadership mark has been mergers and cost cutting.

2. McNeil quality began to slowly weaken in 2002. “The culprit was a familiar one -- cost cutting -- but in a subtler form. There were no wholesale layoffs in quality control. Instead experienced staffers were repeatedly laid off and replaced with newbies who mostly lacked technical pharmaceutical experience. By 2008 the analytical laboratory, formerly staffed almost entirely by full-time scientists, was half-full of contract workers.

"Once stricter than a schoolmarm, the department grew lax. The team that tested the production lines was dubbed the "EZ Pass system." In one instance an engineering flaw on a line made it difficult to clean liquid-medicine bottles. Rather than find a way to fix the problem, an engineer says, the team instead tried to simply eliminate that check from the test. "They were trying to take a lot of short cuts.”

3. One day in 2005 a batch of more than 1 million bottles of St. Joseph aspirin failed a quality test because a sample didn't dissolve properly. Following company procedures, two employees blocked the batch from being shipped. Their manager then called them into his office. "He said, 'You like working here? This should pass. There's no reason this should fail.'" Ultimately the two quality workers were ordered to retest the drugs, then average the new scores to arrive at a passing grade so that the pills could ship. Says one of them: "You get to the point where, like me, you end up doing what you're told."

4. The last few stories show McNeil already had a compromised internal quality function. Then came the integration with Pfizer’s consumer products division. The target was $500 to $600 million in cost savings from combined production lines. One former executive described the environment. "I was given savings goals that were mind-boggling, unheard-of. They were raised by 25% to 30%."

5. A Vice President remembers arguing with McNeil executives about how much it would cost to transfer Pfizer production lines to McNeil's Fort Washington plant, an arduous process that is heavily regulated. "The normal cost to do a transfer for a product might be $600,000" he says. "Those folks would say, 'That's way too expensive. It's only going to cost $250,000.'" McNeil employees knew it would be nearly impossible to meet those demands, he says, without screwing the process up. But they did it anyway for fear of being fired.

That same year, 2007, J&J announced it was laying off more than 4,000 people. The workforce at the Fort Washington plant was slashed by 32% between 2005 and 2009. The biggest cuts came on the factory floor.

A layoff casualty was the corporate compliance group, a SWAT team meant to keep the various quality-control groups in line. A former executive said after the group was cut, some divisions lost their focus on quality. "The heads of the operating companies let their hair down."

6. Weldon’s plan to hire a chief quality executive rankled staffers, given the 2007 elimination of J&J’s corporate compliance group, which rode herd on quality.

7. Weldon gave two drastically different messages to Fortune, “We hope we never experience this again.” “Quality remains our #1 focus.”

It's clear William Weldon's focus has not been quality. Weldon's mark is a never ending cycle of been doing more with less, interspersed with stretch goals. William Weldon isn't alone.

Four years before the Texas City refinery explosion, BP issued a stretch goal. "Reduce business unit cash cost for the year 2001 by at least 25 percent from the year 1998 levels."
BP CEO Lord John Browne oversaw that decree with its deadly consequences. Browne is doing the same for the British government. William Weldon is in good company. It's a club, one producing a record "wealth gap" along with "buyer beware."

Update 1-14-2011: Yet another Tylenol recall due to insufficient or undocumented equipment cleaning.

Monday, September 13, 2010

Carlyle Partner Bob Johnson on Wealth Gap

Robert L. Johnson will speak at Johns Hopkins University on “A Society Divided: The Growing Wealth Gap and the Role of American Business.” Johnson is famous for his founding of Black Entertainment Television (BET). He's less well known as a private equity underwriter (PEU).

Bob Johnson partnered with The Carlyle Group in 2005. Carlyle provided seed equity for RLJ Equity Partners.

Carlyle experienced astronomical growth in the new millenium. PEU's benefited mightily from carried interest taxation, one factor contributing to America's soaring "wealth gap." Will Mr. Johnson speak to this tax feature? Will he tout the private equity model, now ubiquitous on the world greed stage?

RLJ Equity's investments include a Brazilian tour operator, industrial vinegar and precision engineered components and assemblies. Their latest deal involves Enhanced Recovery Company, LLC, the largest minority owned accounts receivable management company in the country.

Who provides Enhanced Recovery Company more business, the have's or the have not's? Johnson mines the wealth gap and political connections to further his mountaintop position. It's the PEU way.

Sunday, September 12, 2010

Dubai World Holdout: Aurelius Capital

FT reported:

Aurelius Capital Management, a US distressed debt fund, is the only creditor of Dubai World not to have approved a restructuring agreement on the troubled conglomerate’s $25bn of liabilities, according to people close to the talks.

Dubai World said on Friday that it had reached a formal agreement to restructure a total of $24.9bn, which includes $10bn owed to the government, with more than 99.9 per cent of its creditors.

Dubai World's total indebtedness was reported as high as $39.9 billion by Reuters. FT went on to describe other Dubai debt restructurings:

Dubai World’s developer Nakheel is still separately negotiating with banks about its $10bn debts, and last week a unit of Dubai Holding – a conglomerate owned by Dubai’s ruler – announced that it was for a second time to defer the payment of a revolving credit facility, as it attempts to reach a wider settlement on as much as $20bn of debt.
As for Aurelius Capital, the distressed debt hedge fund was established in 2005 by Mark Brodsky and Adam Stanislavsky. They could've purchased Dubai World debt for as little as 55 cents on the dollar. Also, Aurelius may have held credit derivatives on DW debt. Would it be in relation to their holdings, a hedge? Or might they be a risky bet? That's not the kind of thing debt holders have to share.

Aurelius surfaced in regard to Ambac and Argentinian bonds. They hold an interest in Citadel Broadcasting and Visteon. Aurelius' most recent 13F-HR was filed in November 2009.

Of course Aurelius has investment vehicles in the Cayman Islands. Their dance with Dubai has a Caribbean World beat.

Carlyle to Take ARINC Public, Scraps Sale

Reuters reported:

Private equity firm Carlyle Group has scrapped plans to sell Arinc Inc after failing to find a buyer for the defense and aviation company in the past six months, several people familiar with the matter said.

Instead Carlyle will take ARINC public.

Arinc's earnings have grown 25 percent annually in the past four years, a source close to the company said.

How did the private equity underwriter (PEU) grow earnings with higher interest expenses? How much did they milk ARINC via management fees and special dividends? Did Uncle Sam stimulate ARINC, besides taking much of the risk for early retiree health coverage?

The S-1 should be interesting, if it's anything like Nielsen's.

As The Carlyle Group is bidding for McKechnie Aerospace, Hartwell employees might want to call their peers at ARINC to find out how three years under Carlyle can age people. That's if they don't disappear altogether.

Update 11-11-12:  Carlyle scrapped plans to take ARINC public.  It sold ARINC's defense division to Carlyle affiliate Booz Allen Hamilton for $154 million.   I wonder how much pressure Booz got to monetize a sister Carlyle company?  Only PEU's know for sure.

Update 2-26-13:  Carlyle plans to sell the rest of ARINC, i.e. back to their original plan.