"Great Cash In" Sends $6.4 billion to Carlyle Investors

Bloomberg reported:

Carlyle Group, the buyout firm that may go public this year, distributed more than $6.4 billion to investors in the first quarter, the most in its 24-year history.

The carry on $6.4 billion would be $1.6 billion.   Carlyle's founders, nicknamed the DBD's, owe Senators Schumer, Bayh, and Baucus, as well as President Obama, a huge thanks on extending their preferred carried interest taxation.  That saved $400 million in taxes.

Carlyle's first IPO came in Europe via Carlyle Capital Corporation (CCC).  It and hedge fund BlueWave Partners collapsed in 2008.  The two moves came while financial firms felt they could do no wrong.  Carlyle unwound BlueWave at a huge loss for investors.

Interestingly, Carlyle bought into hedge fund Claren Road in December.  Is it a sign of frothiness?  Apparently not.

“Now is an opportune time to put capital to work,” (Carlyle) founders William E. Conway, Daniel A. D’Aniello and David M. Rubenstein said in the letter. The firm has “endeavored to find attractive investment opportunities which we believe will ultimately result in superior absolute investment returns.” 

These three are consummate salesmen.  Beware the puffery.

Update 5-5-11:   Bloomberg reported Rubenstein de-emphasized the buyout side of Carlyle's business for the looming IPO.  Carlyle's "great cash in" should make their financial statements shine in the S-1.  Investors may jump in as the barn door closes.  Through the cracks they'll see the DBD's hauling away trailer loads of cash.

Update 5-23-11:  WSJ finally catches up to the story, or are they pumping Carlyle's looming IPO?  Bloomberg added to the hype by re-running the $6.4 billion payout story.

Carlyle's Rubenstein on Risk

“Political risk is as high in the United States as it is in emerging markets,” David Rubenstein, Carlyle Group co-founder, at Thomson Reuters Buyout Conference

Rubenstein cited the debate over Social Security, other entitlement problems and the large deficit. Carlyle affiliates milked the federal government at multiple turns:

Advising-Booz Allen Hamilton
TARP-Boston Private
Tax breaks for buying back debt for pennies on the dollar-LifeCare
Direct subsidies/earmarks-Vought Aircraft
FDIC recapitalization (over $2.2 billion)-BankUnited

I'm sure there are many more, especially for a man so prescient in reading tea leaves.  PEU Carlyle benefited from eight years of Bush tax cuts, which became Obama tax cuts.  Four times Congress maintained preferred carried interest taxation for PEUs, which helped Rubenstein crack Fortune's Richest list in 2007.  Carlyle off-shored many investments, DBD Cayman, and their corresponding profits, not to mention jobs-UCI.. 

Rubenstein continued at the Buyout Conference, "until those (problems) are solved, the country will not be able to resolve its high unemployment rate."  Carlyle's brand of greed helped shrivel America's middle class, not to mention cracking its financial foundation.

“The problem is that we don’t have enough financial stability in our economy.”  

That means Rubenstein must look elsewhere for 30% annual returns, China, Asia and the Middle East, i.e. centrally controlled governments with sovereign wealth firms and billions to invest in PEU's.  Rubenstein isn't ready to declare the end of Carlyle's sweet U.S. run.

The United States will still dominate the (private equity) industry for another five years or so

If he said any shorter, investors might not pony up for Carlyle's independent public offering.  Watch for puffery.  David Rubenstein and his ilk helped create the current state, much more so than the average citizen. 

I recently told my 95 year old grandmother that America started another war with Libya.  She said, "A rich man must need to make money."  That's the same reason Rubenstein will milk America, while setting up other nations to fatten his pocketbook.  By the way, Rubenstein courted Gadhafi beginning in 2006.  Is the political risk high because citizens paid attention to American leaders, their influence peddling and money flows?  That'd be my hope.

Tenet CHS Fight Turns to Hair Pulling

Community Health Systems (CHS) made an unsolicited offer to buy Tenet Healthcare.  The gloves came off almost immediately.  After several months in the acquisition cage, both fighters are bloody, beaten and tired.  With no access to a barber, their locks are now long.  Tenet grabbed a big chunk of Community's teal green hair and yanked with its latest accusation (Courthouse News):

Tenet says CHS increased the revenue of Triad, a hospital operator it acquired in 2007, through "CHS's systematic reduction in the observation rate at the former Triad hospitals - a stunning 52 percent drop in one year following the acquisition."

Tenet says CHS uses "liberal" criteria to decide whether to admit patients or treat them as outpatients, at a lower cost, and claims that "CHS artificially increases inpatient admissions for the purpose of receiving substantially higher and unwarranted payments from Medicare and other sources.

CHS has reaped enormous sums through its admissions practices. Avalere, a leading healthcare advisory firm, estimates that, between 2006 and 2009, CHS received approximately $280 million to $377 million from treating inpatient admitted Medicare patients in CHS hospitals" who could have been treated in observation, the complaint states.

Tenet says Medicare pays as much as $7,000 more per hospitalized patient than it would for outpatient services for the same patient.

Tenet adds that by improperly billing Medicare, CHS has violated the False Claims Act, and may be liable for more than $1 billion in penalties.

It takes one to know one.  Tenet settled with Medicare for unlawful billing practices at a cost of $900 million.  The Justice Department news release stated "the agreement requires Tenet to pay:"
:

-- more than $788 million to resolve claims arising from Tenet’s receipt of excessive “outlier” payments (payments that are intended to be limited to situations involving extraordinarily costly episodes of care) resulting from the hospitals’ inflating their charges substantially in excess of any increase in the costs associated with patient care and billing for services and supplies not provided to patients;

-- more than $47 million to resolve claims that Tenet paid kickbacks to physicians to get Medicare patients referred to its facilities, and that Tenet billed Medicare for services that were ordered or referred by physicians with whom Tenet had an improper financial relationship; and,

-- more than $46 million to resolve claims that Tenet engaged in “upcoding,” which refers to situations where diagnosis codes that Tenet is unable to support or that were otherwise improper were assigned to patient records in order to increase reimbursement to Tenet hospitals.

Tenet paid a $54 million fine for performing unnecessary cardiac procedures at their Redding, CA facility. In addition they set up a $395 million fund to compensate over 700 victims.

Tenet also settled with the state of Florida for $7 million regarding unethical billing practices under Medicare & Medicaid.  Ex-Florida Governor, John Ellis (Jeb) Bush, landed a spot on Tenet's board in April 2007, after W.'s Justice Department reached the $900 million Medicare settlement.  Tenet lobbied the White House in early 2006.  They addressed two issues, corporate governance and the federal response to Hurricane Katrina where Memorial Medical Center, a Tenet owned facility, lost 35 patients.

Tenet has no credibility on the ethics front.  Pot meet kettle.

PEU Benefits: Girth or Dearth?

The PECKER Council commissioned a study by Price Waterhouse Coopers on the impact of private equity underwriters.  The PriceWaterhouse study begins on page 7 of the linked report.  Peruse it closely for how PEU's operate ethically.  It details how The Carlyle Group shot their load on Carlyle Capital Corporation, the canary for the 2008 financial crisis.  Pay attention to Carlyle Capital Cayman, short term repo financing of long term assets, Bear Stearns/Lehman Brothers' role in financing CCC and credit derivatives.

The world has seen at least six financial crises that arose largely because companies and banks were financing illiquid assets with short-term debt--McKinseyQuarterly. 

No systemic risk here, just peckers screwing somebody.  It's a never ending cycle.

Update 4-28-11:  Not surprisingly the biggest PECKERS come from politics.  Don your flak jacket, PECKERS are coming.

Update 4-30-11:  The Economist followed up with a "size matters" sexual innuendo piece on Carlyle.  For some reason Economist found only five Carlyle failures, when there were twice that many.  They did note the powerful impact of the DBD's, but failed to cite their Cayman connections or citizen supplied corporate welfare.  Posing for an IPO, Carlyle shows lots of skin.  Not a pretty sight for fat men.

Update 6-23-11:  Carlyle seeks to penetrate Africa's lower region. Recall how Carlyle's Rubenstein compared the PEU buyout boom to sex? 

McCain's Return Trip to Libya

Senator John McCain visited Libyan rebels, making a point to say they weren't al Qaeda.  McCain compared them to the Afghan muhajadeen.  Did McCain forget they were an al Qaeda ally against the Russians?

Citizens are expected to trust McCain, who tweeted from the Gadhafi ranch in August 2009.

Late evening with Col. Qadhafi at his "ranch" in Libya - interesting meeting with an interesting man.

Did McCain find his meeting with rebels "interesting?"  While  John's assessment skills are questionable, the rebels corporate abilities are impressive.

Carlyle Sets Sights on Malaysian Bank: RHB Capital

Reuters reported:

Carlyle Group and TPG Capital are in talks to launch a joint bid for a $1.5 billion stake in Malaysian lender RHB Capital, three sources with direct knowledge of the matter told Reuters on Thursday.

Abu Dhabi Commercial Bank owns the stake and has hired Goldman Sachs and Bank of America-Merrill Lynch to run the auction.

Under-capitalized Abu Dhabi Commerical Bank will sell its 25% stake in RHB.  Originally ADCB approached banks, but private equity underwriters (PEU's) got involved. 

How might PEU's impact Malaysia, which suffered a currency crisis and property crash in the late 1990's.   PEU's bloodied their nails during America's financial implosion in 2008.  Where will Malaysia and Carlyle be in 2018?  Bubbly...

Blackboard: Chalking Up Profits for Shareholders?

Blackboard is for sale. The company hired Barclays after receiving unsolicited proposals. The Carlyle Group took Blackboard public in 2004. It might return to private equity underwriter (PEU) hands.

Major shareholders as of 4-21-10 included:

Janus Capital Management, LLC(2)			3,676,260				10.83	%
151 Detroit Street Denver, CO 80206
BlackRock Inc.(3)			2,846,409				8.38
40 East 52nd Street New York, NY 10022
Waddell & Reed Investment Management Company(4)			1,921,646				5.66
6300 Lamar Avenue Overland Park, KS 66202
Artisan Partners(5)			1,815,300				5.35
875 East Wisconsin Avenue Suite 800 Milwaukee, WI 53202

Much changed over the last year, including Blackboard's share price:

.

Janus Capital upped its stake to 4.3 million shares or 12.6% of Blackboard common stock.  Artisan Partners holds 2.9 million shares or 8.5%, while Waddell & Reed lightened its share load to 173,000 shares.

New entries included Blackrock and T. Rowe Price.  T. Rowe Price owns 3.5 million shares or 10.2% as of 1-31-11, buying the last 600,000 shares in January.  Blackrock holds 2.8 million shares or 8.3% of Blackboard.  Blackrock's Larry Fink likes totalitarian governments.  Might a sovereign wealth fund (SWF) bid on BBBB?  Russia has $10 billion to co-invest with PEU's and SWF's.

Who wins and how much under a Blackboard sale?  You do the math.

P.S. Standard Times legendary publisher Houston Harte insisted reporters find the local angle to any story.  Angelo State University uses Blackboard.  If other universities are as financially stressed as ASU, Blackboard's customer base is severely limited, at least in purchasing power.

Carlyle Group Continues Pre-IPO Monetization

The Carlyle Group will monetize two affiliates, The Mill through direct sale and Wesco Aircraft via an independent public offering (IPO).  As The Mill sale is private, information is scant.  Not the case with Wesco, its S-1 reveals interesting tidbits, including a private equity underwriter (PEU) strategy, the management fee:

Wesco paid Carlyle $1.2 million, $1.0 million, $1.1 million for the years ending September 30, 2008, 2009 and 2010, respectively, related to the Management Agreement.

Carlyle likes businesses where Uncle Sam foots the bill, at least a nice chunk of it.  The military represents 53% of Wesco's end users.

Wesco likely received fastener orders from Vought Aircraft Industries, a Boeing 787 Dreamliner contractor and former Carlyle affiliate:

Recently, Boeing began in-sourcing portions of its supply chain management system in an attempt to reduce its costs

We estimate that 10% of our net sales during fiscal 2010 were derived from sales to a number of customers related to the Boeing 787 and that approximately 20% of the parts we held in inventory primarily pertained to the Boeing 787.

We have recently been notified by Boeing of its intent to perform certain supply chain management functions in-house that we are currently providing at two Boeing facilities, under JIT contracts that were awarded to us when these particular facilities were under different ownership (Vought?).

In fiscal 2010, sales under these contracts accounted for approximately 5.8% of net sales. If production of any of the programs we support is terminated or delayed, or if our sales to customers affiliated with these programs are reduced or eliminated, our business, financial condition and results of operations could be adversely affected.

Vought gunked up the Boeing 787 production line, which received a tangential mention from Wesco.

We increased our inventory in anticipation of deliveries of the Boeing 787, which have been significantly delayed.

Fasteners contributed to the Dreamliner's tortuously slow start.  Vought's CEO encouraged employees to keep the faith in June 2007.

Boeing projected first flight in late August (2007) and first delivery next May.

The 787's first flight leaked from August 2007 to December 2009.  First delivery went from May 2008 to third quarter 2011.

Who might clarify Wesco's involvement in the Vought/Boeing quality debacle?  Carlyle's Peter Clare could shed light, as he was on the board of both Carlyle affiliates.. 

During the years ended September 30, 2009 and 2010, the Company maintained approximately 22% and 20%, respectively, of its inventory in parts that are primarily used in Boeing 787 aircraft. To date, Boeing has experienced a number of delays in completion of this aircraft. As such, there is a risk that the Company will not be able to realize some portion of this investment.

Thus, public shareholders should take the risk.  PEU Carlyle will realize gains on as many investments as possible, pre-IPO.  It looks like one huge profit-gasm.

Update 4-20-11:  Carlyle's "carry maximization" includes moving its stake in 650 Madison Avenue.  Bloomberg ran a piece on PEU real estate aspirations. "Carlyle is in the process of raising a new fund for U.S. property deals."

Update 7-29-11:  Carlyle expects four times its original investment even though Wesco priced below its expected range.

Face of Capitalism: PEU

“By the time the bubble burst in 2007, the (private equity) industry had over $1,000bn under management and had become the face of capitalism to some extent."--David Rubenstein, Carlyle Group co-founder

Rubenstein continued on the power of private equity underwriters (PEU's).  FT reported:

Mr Rubenstein says the power of the top-tier buy-out firms has depended on three factors. One, the rates of return “turned out to be better than almost anything else you could do with your money”. Two, the pension funds that invested in private equity groups needed those returns because they were badly underfunded, given their huge and growing liabilities. And finally, the model included taking 20 per cent of the upside of any deal. “If you can make 20 per cent of the profits on other people’s money, you are going to make a lot of money if you are good at what you do.”

Actually, there's a fourth factor driving the power of top-tier PEU's, political patronage.  PEU clubbing, donations and lobbying un-leveled the playing field in their favor.  How did Uncle Sam help?  A Blue White House and Congress provided a projected $26 billion in tax breaks for firms buying back debt on the cheap.  FT cited this strategy as the cause of Apollo's resurgence, which recently employed former benefactor Senator Evan Bayh.

PEU puffery has firms going public, in direct opposition to their long marketed "private competency."  Be clear, PEU's will say almost anything to profitably grow and monetize an asset, while avoiding responsibility for the consequences of their greed and avarice.

PEGCC Says No PEU Systemic Risk

The Private Equity Growth Capital Council (PEGCC) told the SEC that private equity underwriters (PEU's) pose no systemic risk.

The meltdown in September 2008 sent financial institutions into sheer panic.  Rich people no longer trusted their peers to make good on debts.  The inability to meet capital calls sent storied institutions into bankruptcy. Lending dried up, requiring Uncle Sam and the Fed to backstop the system with trillions ($) in interventions.

The Carlyle Group played a direct role in the meltdown.  PEU's drank the same euphoric spirits as Wall Street, believing asset prices would never come down in an environment of permanently cheap, unencumbered debt.  The hangover hurt like hell.

Carlyle Capital Corporation (CCC), a mortgage backed security fund levered 40 times, imploded in March 2008 after failing to meet over $400 million in capital calls.  The Carlyle Group welshed on lenders, leaving rich investors with an empty CCC bag.  It's a good thing investor CalPERS didn't behave like puffy Carlyle.  The California pension made good on Carlyle's $681 million in capital calls.

PEGCC stated in their news release:

"Private equity firms should not be singled out among all shareholders of businesses in the United States to be subject to report on their borrowing decisions."  

Just a rag tag group of corporate shareholders? Hardly. PEU's hate sunshine.  One might expect incomparable, great businessmen to handle simple sharing of information, especially one with a compliance solutions affiliate.  PEU's play by their rules, which Congress is kind enough to write into law.

PEU's may have a way to keep from losing companies completely to debt holders, contingent capital.  It automatically delevers a company based on certain triggers.  Congress gave a year to study PEU's and contingent capital.  What will they learn that they don't already know?

Libya's Rag Tag Group of Corporate Rebels

Robert Wenzel of Economic Policy Journal queried the purpose of the meeting between Treasury's Tim Geithner, State's Hillary Clinton and Defense's Bob Gates on April 11.  I commented:

My guess is Libya. They need to discuss how to support Libyan rebels, a surprising rag tag group of corporate experts:

Wenzel found the likely reason for the meeting, via Bloomberg.

Libyan rebels want to borrow at least $2 billion to buy food, medicine, fuel and perhaps weapons as their foreign allies agreed on the need to do more to help them prevail over Muammar Qaddafi’s forces.

Members of the so-called Libyan contact group said in a statement in Qatar that they may create a “temporary financial mechanism” to finance the rebels using Libyan government assets frozen abroad.

Tim Geithner let Arab Banking Corporation continue operating, despite 59% Gadhafi ownership.  The Carlyle Group never said how much Libyan Investment Authority capital it holds.  Surely, current Libyan assets are levered in some manner.  How many times can people borrow on the same Libyan collateral?

Carlyle Group Surfs Central Pacific Bank

Central Pacific Bank struck a deal with The Carlyle Group and Anchorage Capital, private equity underwriters (PEU's).  Carlyle's press release stated:

Each of The Carlyle Group and funds managed by Anchorage Capital Group, L.L.C. will own 24.9% of the common stock of the Company prior to giving effect to the rights offering. The shares of common stock will be purchased at $0.75 per share for an aggregate price of $195 million. Each Lead Investor shall be entitled to one Board seat on each of the Company and Bank boards of directors.

The deal mentioned the company executing a 1 for 20 reverse stock split,  Applying the reverse split to the announced deal, Carlyle and Anchorage would pay $15 per share.  They paid $10:

SEC filings named the lower price while stating how existing shareholders could participate via stock rights:

The Company announced the record date for its planned common stock rights offering (the “Rights Offering”) was the close of business on February 17, 2011.  The rights will be transferable and will entitle holders to purchase newly issued shares of the Company’s common stock at a purchase price of $10.00 per share (after giving effect to the reverse stock split described below), which is the same per share purchase price to be paid by investors in the Private Placement.  

Carlyle's deal was contingent upon regulatory approval of the capital raise outside the Securities Act of 1933, exchanging its TARP preferred stock for common and amending its TARP warrant. Check, check, check.

Central Pacific Financial Corp. (NYSE: CPF) (the “Company”), parent company of Central Pacific Bank (“CPB”), today announced that it has received all required regulatory approvals necessary to complete its planned $325 million capital raise from accredited investors in a private placement (the “Private Placement”). The Company also entered into an agreement today (the “Exchange Agreement”) with the United States Department of the Treasury (the “Treasury”) pursuant to which the Treasury will exchange 135,000 shares of the Company’s preferred stock designated as Fixed Rate Cumulative Preferred Stock and accrued and unpaid dividends thereon for 5,620,288 shares of the Company’s common stock (the “TARP Exchange”). All other closing conditions have previously been satisfied or will be satisfied concurrent with the closing of the Private Placement.  Accordingly, the Company has set February 18, 2011 as the closing date for both the Private Placement and the TARP Exchange.

Uncle Sam traded $135 million in preferred stock, plus accrued/unpaid dividends, for 5.6 million common shares.  At the $10 private placement price, Uncle Sam gave up $135 million for $56 million.  At $15, Treasury received $84 million for $135 million.  This is how Carlyle makes bank deals work.

"CPF has made significant strides in improving its asset quality and we are delighted to partner with the Company's strong management team as it continues to execute its recovery plan," said P. Olivier Sarkozy, Carlyle Group Managing Director.

Central Pacific had $4.2 billion in assets when the deal was announced.  It's down to $3.9 billion.

"We believe CPF has a valuable core franchise and with this capital it is well positioned for future growth and success." 

The investing public finally put the pieces together.  Central Pacific's share price plummeted today.

Central Pacific warned "existing shareholders interests will be substantially diluted and the market price of our common stock may decrease to a level at or below the purchase price in the Private Placement."

How fast will they flip their deeply discounted shares?  The February 2011 capital raise provided 32.5 million shares, of which 18.5 million could soon be for sale.

Uncle Sam's generosity will help Carlyle profit, once again.  Carlyle holds Central Pacific's common stock in a Cayman Islands account named after their founders, David-Bill-Daniel (DBD),  DBD Cayman.  It's a game the big boys play.

Carlyle's Malaysian Numbers Game

Citigroup approached The Carlyle Group and Providence Equity Partners to buy a stake in Berjaya Sports Toto Bhd's gaming unit for nearly $1 billion.  Malaysian tycoon Vincent Tan is considering selling a 49 percent stake in his privately held gaming company. Reuters reported:

Gaming assets in Malaysia must be majority Malaysian-owned, which is why Tan is limited to selling 49 percent. Tan is exploring the sale of a unit called Sports Toto Malaysia, which houses the Malaysian gaming assets. That business has 680 outlets offering numbers games and generated 3.6 billion ringgit ($1.2 billion) in 2009, according to Berjaya's website.

Carlyle knows numbers games,as does Citigroup's Peter Orszag.  Is their numerical genius squared on the Sports Toto deal?.

Carlyle to House "Avatar" Sequels

Hollywood Reporter wrote:

Director James Cameron and 20th Century Fox have signed a lease for studio and office space at MBS Media Campus in Manhattan Beach and will use the facility for the motion capture photography and high-tech production on two highly-anticipated sequels to Avatar, the biggest blockbuster of all time.

Completion of the Manhattan Beach deal with Raleigh Studios, which operates the property for its owner, private equity firm Carlyle Group, ends a long search for Avatar’s new home.

Art meets life, as Carlyle doesn't hesitate to use government power to advance its private equity interests.  Avatar found a PEU owned home.  (PEU stands for private equity underwriter.)  It's unclear how the Navi can take back their world from ubiquitous greed, like Carlyle's.

James Cameron and Carlyle share an interest in Brazil.  I can see a Brazilian Avatar tour, put together by Carlyle affiliate CVC, with travel health insurance by Qualicorp.  Will the Navi wear Scalina lingerie?   How might digital media affiliates The Mill or The Foundry benefit.  Either way, I smell bazillians.

Carlyle Group Goes for Third Saudi Deal

Arab News reported:

US private equity firm Carlyle Group expects to complete a deal in Saudi Arabia by the end of the year, a senior executive said. He did not reveal details on the investment amount or the company the private equity firm was looking to invest in.

“We are still enthusiastic about investing in the GCC and hope to close a deal in Saudi Arabia before the end of the year,” Firas Nasir, managing director for Carlyle and the executive in charge of the firm’s Dubai office, said on the sidelines of a conference in Dubai.

While Arab News wasn't looking, Carlyle increased its assets under management to $106.7 billion and sold more equity to Mubadala Development Co, which now holds 9.35% of Carlyle.  How will new Arab affiliates participate in Carlyle's potential IPO?  Maybe, Arab News can find that answer.

BP's Federal Teats

BP's federal assistance arose in two news stories.  The first regarded BP Wind Energy's expansion in West Texas.  The company will install 60 turbines east of Fort Stockton.  GreenTech Media reported:

On the federal level, President/CEO John Graham focused on two matters with one theme. “The tax incentives and grants,” he said, “are very important as the industry develops to keep the price of wind competitive.” 

BP Corporation North America received  $5.3 million from Uncle Sam via the Early Retiree Reinsurance Program (ERRP).  That's small change compared to AT&T's $140 million or Verizon's nearly $92 million.

Other companies getting ERRP money include:

CITGO Petroleum--$1.2 million
Marathon Oil Company--$1.7 million
Valero Energy--$1 million
Shell Oil--$4.4 million

Arch Coal--$216,000
Patriot Coal--$4.6 million
A.T. Massey Coal-yet to file a claim

ERRP paid out nearly $1.8 billion as of March 17, 2011.  Employers wanting to join BP on the federal teat may need to rush their application.  The cutoff date is May 5.  Modern Healthcare reported:

Based on spending trends, the CMS said it would no longer accept new employer applicants after May 5. The program began disbursing payments to plan sponsors last October for claims incurred after June 1, 2010.

Belly on up to the bar, boys...  Uncle Sam is buying!  (At least until May 5th)

Carlyle Group Shatters $100 Billion Barrier

The Carlyle Group smashed through the $100 billion under management mark, rising $9 billion to $106.7 billion.  Carlyle co-founders David Rubenstein, William Conway and Daniel D'Aniello stand to shoot up the Fortune richest list with a Carlyle IPO.  Other groups beside the DBD, David-Bill-Danny, stand to gain.

Mubadala Development Company, a United Arab Emirates sovereign wealth fund, holds 9.35% of Calyle
This is up from their initial stake of 7.5%, purchased in 2007.  Offering additional equity before a looming IPO could help assuage Arab anger.

CalPERS owns 5.5% of Carlyle.  Reuters reported CalPERS bought the stake in 2001 for $175 million.  CalPERS estimated its Carlyle ownership at $334 million in a 2010 investment report.

Private equity underwriters (PEU's) experienced huge growth over the last decade.  Carlyle grew from $3.3 billion in 2000 to $106.7 billion in 2011, a 3,133% increase.  As an early investor, CalPERS should participate mightily from Carlyle's IPO.

Carlyle brags of 30% annual returns for investors, driven in part by being a private firm.  Why give up this distinctive competency?  It's time for the DBD's to monetize their holdings, a la Pete Peterson and David Schwarzman of Blackstone.  Pete got out at the top.  Maybe the DBD's will have similar luck.  I hope they're sitting down when they receive their winnings.

Update 4-16-11:  Both CalPERS and Carlyle face ethical issues regarding bribes, a.k.a. placement fees. 

The Week in Carlyle

The Carlyle Group had a busy week.  According to news reports, Carlyle:

May invest in Indian hospitals (WSJ)

Took an equity stake in PixelOptics, maker of innovative eyeglass that retail for $1,200 (Roanoke Times)

Financed European deals with cheap, plentiful leveraged loans (Bloomberg)

Joined two other PEU's in bidding $2 billion for CitiFinancial, rebranded OneMain (FT)

Affiliate Moncler SpA filed for an IPO on the Italian Stock Exchange (DowJones)

Affiliate Allison Transmissions hosted President Barack Obama.  It's the latest Presidential pilgrimage to an Allison facility (Detroit News)

Invested in ADA Cosmetics, a supplier of cosmetics and accessories for the hotel industry. Products are offered to premium hotels in Europe, Asia and the Middle East.  (Unquote)

Decided it didn't need the Texas Legislature to give it rate charging authority for their Galveston Port deal (Galveston Daily News)

Tried to convince Los Angeles World Airports that it had the right strategy to turn around Ontario International Airport.  (Press Enterprise)

Helped joint-venture partner Seaspan get an upgrade by Jeffries.  The billion dollar JV is for Chinese ships. (Benzinga)

Benefited from ExxonMobil's agreement to pay $18 million to clean up Connecticut rest areas, a 35 year Carlyle concession. (Stamford Advocate)

Closed the $6.1 billion deal monetizing ManorCare's nursing home facilities (CityBiz Real Estate)

Saw strong investor interest in Booz Allen Hamilton.  Carlyle holds 77% of BAH's common stock after the IPO.  (American Banking & Market News)

Co-founder David Rubenstein chaired a gala honoring global leaders who embrace openness. (Bisnow)

As for openness, Rubenstein is yet to reveal the amount of Gadhafi cash his PEU holds via the Libyan Investment Authority (LIA).  When he does speak, one must also be mindful of Rubenstein's propensity for puffery.

Update 8-6-11:  Carlyle parlayed their investment in PixelOptics into Elenza, an intraocular lens maker.

Texas Gov. Rick Perry: PEU Venture Capitalist

Governor Rick Perry can make equity investments in private companies through the Texas Emerging Technologies Fund.  This is in addition to grant monies the Governor awards.  A Senate bill updates the reporting requirement, but does not have Perry showing his investment performance.  

a brief description of the equity position that the governor, on behalf of the state, may take in companies receiving awards and the names of the companies in which the state has taken an equity position.

Governor Perry's 2011 TETF report states:

The Texas Emerging Technology Fund has made awards under Subchapter D, Incentives for Commercialization, to recipients that included the issuance to the Office of the Governor, on behalf of the state, of either:

• a warrant exercisable to purchase shares of common stock of the company receiving the award, subject to the occurrence of certain vesting events; or

• a right to purchase shares of common or preferred stock of the company receiving the award, subject to the occurrence of certain vesting events.

The bill heads to the House, which failed to hold Perry accountable for problems with the Emerging Technologies Fund or prior excesses with a sister fund, the Texas Enterprise Fund. Ironically, Governor Perry tapped the Rainy Day fund for his corporate welfare projects.

Governor Perry has the skills to work for a shadowy, private equity underwriter (PEU).  When will he do so?  My guess is it will be after his Presidential run.  There's bigger payola to share with donors.

Update 4-12-11:   The Texas House will consider a bill incentivizing solar projects in Texas by charging a fee on residential, commercial and industrial electric bills.  It's expected to provide $300 to $400 million in rebates to solar producers over a five year period.  The logic is:  "Our goal is, we want to see these companies come to Texas. But these are people who, if we don't create the program, they will go somewhere else and these other states will reap the benefits of the sales tax, the sales dollars and job growth."  Isn't that what the Texas Enterprise Fund and Texas Emerging Technology Fund are for, incentivizing firms to come to Texas?

Libyan Rebel Oil Shipment Leaves Port

Lloyd's List reported a 1 million barrel shipment of rebel oil left Libya on April 6. The last shipment of Gadhafi oil left on March 18.  U.S. led airstrikes began March 19.   The rag tag group of rebels is surprisingly sophisticated, at least corporately:  They established a Central Bank and Rebel Oil Co. within days of the UN authorizing the imposition of a "no fly zone."

Arabian Business reported:

The rebel-led government said it had concluded a deal with Qatar to market crude oil and had discussed plans with a UN envoy to exempt its oil exports from sanctions that have been imposed on Gaddafi entities.

Rebels will need a bank to facilitate the movement of $100 million shipment aboard the Equator.  George Prokopiou expects payment for the use of his ship.  Might the bank be the Arab Banking Corporation?

Update 4-24-11:  Bloomberg reported the shipment garnered $120 million for the Rebels.

ERRP Payments & Campaign Donations

 Obama's victory in the 2008 general election was aided by his tremendous fund-raising success.

A number of President Obama's top donors received ERRP checks from the federal government.  ERRP stands for Early Reitree Reinsurance Program.  It's a $5 billion pot of money which effectively takes on employer's retiree health care risks, at least a big chunk of it.

. . Early Retiree Reinsurance Program Recipient ERRP Payments as of 3-31-11 2008 Obama Campaign Contributions (PAC) ERRP Return on employee contributions . . GE $36,607,818 $499,130 7334% . Skadden Arps $102,819 $530,839 19% . Harvard University $441,297 $854,747 52% . Citigroup $1,767,406 $701,290 252% . JP Morgan Chase $2,922,102 $695,132 420% . IBM $12,989,690 $528,822 2456%

It's a tale of two lists, donor and ERRP recipients.GE paid no federal taxes the last two years, while getting their $36.6 million ERRP gift.  How much will GE CEO Jeff Immelt pony up for insider access to the White House?  We'll soon find out.

"No Taxes" GE Gets $36.6 million ERRP Check from Uncle Sam

For the second year in a row General Electric reported billions in profits, yet paid no federal taxes.  It turns out Uncle Sam did more than not collect taxes from GE.  It sent $36.6 million, i.e. someone else's taxes, to GE under the Early Retiree Reinsurance Program (ERRP). 

"Not mean, not greedy" Immelt is only doing what's allowed under the law.  Jeff, actions speak louder than words.

Citi Thinks

Citi CEO Vikram Pandit cited statistics and projections in his investor presentation.  The middle class in China and India will balloon by 2014.

Note the Middle Class is defined as households making over $10,000 per year. The U.S. remains relatively stagnant on this measure through 2014.  This means Citi will pursue global opportunities in emerging markets.  

Trade flows show emerging markets on a rocket ascent since 2000:

Guess who else had a banner decade?

Citi is selling CitiFinancial, its U.S. consumer finance arm.  Bidders include a plethora of private equity underwriters. The Carlyle Group is amongst the bidders.  Funny, the Bush years don't feel over...

Update 4-9-11:  Three PEU groups bid roughly $2 billion for CitiFinancial, since rebranded OneMain.  One group has Carlyle, Blackstone and Brysam Global Partners.  Another has Apollo and J.C. Flowers.  The final bidder is Onyx and Clayton Dubilier & Rice.

Scranton Sisters Sell Mercy

A judge cleared the way for Catholic Health Partners' sale of Mercy hospitals in Scranton, Nanticoke and Tunkhannock, Pennsylvania.  For-profit Community Health System (CHS) paid $150 million for the three hospitals and associated clinics, while promising to invest $68 million in capital improvements over a five year period. 

CHS didn't take all of Mercy Health Partners.  It left $214 million in Mercy liabilities with Catholic Health Partners.  It's not clear if these are pension agreements, retiree healthcare, professional contracts or professional liabilities.  I'm sure the judge and attorney general have the details.

The news provided details on the use of $68 million in capital

CHS Division President Martin Smith said he sees the need for renovations to Mercy Scranton's emergency room and updated equipment in the hospital's catheterization laboratory.

Emergency rooms are a high cost avenue for treatment.  Cardiac cath labs fit in the same category.  It doesn't bode well for health care costs decreasing anytime soon.  CHS had this to say at a Barclay's Capital conference in March:

ER Strategy: “The Front Door” of CHS’ Hospitals:

Initiatives
Renovations/Expansions – 54 projects completed, several currently under way
Marketing Programs - ER+
ProMed – Emergency room data tracking, quality management and measurement tool
Discharge call back implementation

Results
Improved patient satisfaction
Contributed to same store admission growth

CHS's total commitment of $218 million vs. CHP's $214 million Mercy liabilities makes this a fire sale. The deal echoes Cerberus Capital's acquisition of Caritas Christi Health System. 

Community Health System committed to keep Mercy's Catholic mission.  It's not clear if they have a buyout clause like hellhound Cerberus.

Company officials said the Catholic and charity care policies at Mercy will remain in place.  

What is Mercy's historical level of charity care?  CHS states they gave 3.7% in charity care in 2010.  Did they make any concrete commitments to serve Mercy's charitable mission?  Here's one hint they're backing away:

As part of the sale agreement, two new foundations will be formed to help people who can't afford the health care they need.

Mercy's CEO Kevin Cook provided details on the foundations while praising his new partner:

CEO Kevin Cook. “In CHS we found not only a financially strong and operationally experienced hospital system, but an organization that respects our Guiding Principles and shares our commitment to improve the health of the community.”

 As a result of the sale, approximately $25 million of charitable assets will be maintained in the area. Catholic Health Partners (CHP), the parent company of MHP, has committed to provide approximately $20 million (based on the projected price and after all liabilities are satisfied) between two local, non-profit foundations.

One foundation will be created and governed by local community members from the current Boards of MHP, Tyler Health System Foundation and Mercy Healthcare Foundation. The foundation will receive the $2 million donation from a subsidiary of CHS and will retain oversight for the existing $3.5 million in the Mercy Healthcare Foundation.

A second foundation will be created and governed by the Sisters of Mercy, Mid-Atlantic Community, the original sponsors of MHP, to focus on providing services that develop healthy communities and support the well-being of poor and under-served persons.

That doesn't exactly sound like paying for care needed by poor persons.  It's a shame CEO Kevin Cook won't stick around to clarify.

Look for more nonprofit community hospitals to sell out, a concern I voiced over a year ago. The prospect has CHS CEO Wayne Smith salivating:

"We continued to expand our portfolio of hospitals in 2010 with a very selective acquisition strategy. We believe there are a growing number of independent hospitals that fit our criteria and can benefit from having a proven operator manage their facilities. With the ongoing uncertainties in the economy, and especially with respect to healthcare regulation, we believe there are even greater opportunities ahead for Community Health Systems to make suitable acquisitions."

Suitable?  In the case of Mercy, it was a three piece suit, Scranton, Nanticoke and Tunkhannock.  It will soon be part of CHS, which stated in its last earnings release:

The Company's guidance does not take into account resolution of certain pending government investigations and lawsuits.

In such a case, it helps to own a chunk of Mercy.