Saturday, July 30, 2011

Carlyle to Swoosh into EMEA


The Carlyle Group hired Nike's Rory MacMillan as principal and director of external affairs for Europe, the Middle East and Africa.  MacMillan held a similar position for Nike.  Dow Jones Newswire reported:

"Rory's extensive public affairs and communications background will be a great asset to our investment teams and portfolio companies throughout Europe, the Middle East and Africa," said David Marchick, managing director and global head of external affairs.

Macmillan's role at Carlyle is a newly-created position and reflects the buyout industry's move to interact more closely with governments and regulators as the firm deepens it geographic and product reach throughout the region. 

Carlye hired MacMillan to influence peddle in a PEU world.  Private equity underwriters became ubiquitous in the new millennium, doing so by leveraging political influence.  Carlyle sells directly to Uncle Sam, sponsors legislators who give PEU's preferred taxation and regulatory breaks.   Carlyle benefits from insider access which helps co-founder David Rubenstein's government tea leaf reading.

While swooshing to Carlyle's rescue in Europe, Rory has an Edscha headache to clear.  The Middle East has mostly forgotten the implosion of Carlyle Capital Corporation, given Carlyle's "Great Cash In" and looming IPO.  Marchick already did the hard work, keeping Rubenstein out of the list of people needing to make amends for catering to Libya's Gadhafi.  Rory might influence where Gadhafi's $118 million invested with Carlyle may end up.

Everything's globally fast and like an old pair of sneakers, carries a PEU odor.

Friday, July 29, 2011

Carlyle's Edscha Implosion

The case is Edscha North America Inc., 09-39055, U.S. Bankruptcy Court, Northern District of Illinois (Chicago).   Bloomberg reported:

The Chapter 11 filing came more than eight months after the parent company, Edscha AG, began its own insolvency proceedings in Germany. The companies are ultimately owned by Carlyle Group. The U.S. company listed assets of $6.4 million against debt totaling $672 million, including $629 million in secured claims.  Secured creditors were already paid in part from sales of assets.
The U.S. division of Edscha will make good on less than 1% of Bloomberg's cited debt.

The Pension Benefit Guaranty Corp. will receive $694,000 cash on account of its $11.8 million claim.

The Carlyle affiliate paid 5.8% of the PBGC claim.  Note that Carlyle heavily promotes its investment offerings to pension funds.

Edscha won't make Carlyle's pre-IPO storytelling.  Neither will nine other stories.  It's all part of Carlyle's openness and demystification.

Update 7-31-11:  Capital Buzz reported "it’s shaping up to be the most lucrative in Carlyle’s 24-year history." The "Great Cash In" will climax with Carlyle's IPO.

Saturday, July 23, 2011

CDS for U.S. Treasuries


A lawyer for the International Swaps & Derivatives Association said the trigger for a U.S. debt default is unclear.  Organizations selling credit coverage via credit default swaps (CDS) do not have an operational definition of default. IFR reported:

"It’s not necessarily clear whether US CDS would trigger if they did not manage to resolve the debt ceiling negotiations successfully and then subsequently failed to make coupon payments on Treasuries,” said David Geen, general counsel at ISDA. “Usually it would be a clear failure-to-pay credit event if payments were not made by the end of the grace period. The problem is that there does not appear to be clarity about grace periods on Treasuries and we are currently researching this issue.”

“In order for there to be a credit event there has to be publicly available information that says this payment was due on this day and it wasn’t made, and that may not be that easy to demonstrate,” he added.
 CDS prices on U.S. Treasuries have an interesting history:  Summer 2008 showed:

The cost to insure Treasury debt with credit default swaps jumped to 16.5 basis points, or $16,500 per year for five years to insure $10 million in debt, from 8 basis points on Thursday, an analyst said.

Credit default swaps are used to buy protection against the likelihood of a borrower defaulting on its debt and to speculate on an issuer's credit quality. Protection costs rise when people become more concerned about an issuer's credit quality.
February 2010 found:

In the credit default swap market, the five-year price to insure against a U.S. Treasury default was last about 57 basis points late Friday after rising to 59.3 basis points earlier, a level not seen since April 2009.

This meant traders would pay roughly $57,000 per $10 million in Treasury exposure late Friday. It was also six times less than what it would cost to insure against Greek, Portguese and Spainish government debt

This week's rise in Treasury CDS prices implied traders have priced in about a 5 percent chance of a U.S. government default in the next five years, according to the credit data firm.
With a potential default less than two weeks away, CDS odds didn't increase.  A July 19 Reuters report stated:

Five-year protection costs, the most liquid contract, fell by 2 basis points to 54 basis points, or $54,000 per year for $10 million in debt, according to Markit.
Oddly, in a story comparing corporate debt to Treasuries WSJ pegged the odds of default much lower:

Credit-default swaps on the U.S. now imply a 0.75% cumulative chance of default over five years, according to Moody's Analytics. By comparison, such swaps imply a 0.7% cumulative chance of default for Microsoft over five years, 0.5% for Exxon and just 0.35% for Johnson & Johnson.
Wall Street must see little risk of default, otherwise CDS prices would be rising like 2008.  Also, investors would want coverage on a greater portion of Treasury debt. With $9.7 trillion in Treasuries outstanding, credit default swaps cover a mere $26.1 billion in gross notationals.  That's 0.27%.

Update 7-27-11: Reuters reported one-year U.S. CDS price rose to a record high 85 basis points, up 8 basis points on the day, while 5-year U.S. CDS increased 3 basis points at 62 basis points, a level not seen since February 2010, according to data firm Markit.  NPR put together a graph.  Note CDS prices are a fraction of levels seen after Lehman's implosion

Tuesday, July 19, 2011

Robber Baron Preserves Magna Carta: Document of Barons


Carlyle Group co-founder David Rubenstein showed his philanthropic side by donating funds to restore his copy of the Magna Carta.  Isn't he improving the value of an asset he purchased at auction for $21.3 million?  The document is at the National Archives under a long term loan.  

It's symbolic for a modern day robber baron to own the Magna Carta, which entrusted 25 barons to enforce its provisions:

Earls and barons shall be fined only by their equals, and in proportion to the gravity of their offence.
The document addresses men who destroy people or property:

The guardian of the land of an heir who is under age shall take from it only reasonable revenues, customary dues, and feudal services. He shall do this without destruction or damage to men or property. If we have given the guardianship of the land to a sheriff, or to any person answerable to us for the revenues, and he commits destruction or damage, we will exact compensation from him, and the land shall be entrusted to two worthy and prudent men of the same `fee', who shall be answerable to us for the revenues, or to the person to whom we have assigned them. If we have given or sold to anyone the guardianship of such land, and he causes destruction or damage, he shall lose the guardianship of it, and it shall be handed over to two worthy and prudent men of the same `fee', who shall be similarly answerable to us. 
Robber baron equivalents are management fees and carried interest.   They count on high interest expenses cutting into monies owed the Crown (Uncle Sam).  A number of Carlyle affiliates harmed people or property.

1.  LifeCare lost 25 patients after Hurricane Katrina.  Carlyle is vigorously fighting wrongful death lawsutis.

2.  Vought Aircraft promised Texans 3,000 new jobs for $35 million.  It cut 35.  Carlyle's founders could easily repay the debt.

3.  Yashili's melamine tainted milk sickened Chines babies and toddlers.

4.  Claris LifeSciences sold sterile injectables with foreign matter

There are many more sad stories of property destruction and people harmed, including Carlyle Capital Corporation, Blue Wave Partners, SemGroup, and the great employee shedding at UCI.  Where are the two worthy and prudent men who are supposed to come to the rescue?

Update 7-31-11:  Rubenstein will receive the Records of Achievement Award from the National Archives for his philanthropy.

Update 8-17-11:  Duke University will rename its Rare Book, Manuscript and Special Collections Library in honor of Rubenstein for his $13.6 million gift.

Update 2-18-12:  The Rehab PEU Rubenstein tour continued with a piece by McClatchy

Carlyle's Marchick Tells Kuhlman Story


Ex-Clinton White House staffer and Carlyle Group Managing Director David Marchick testified before Congress on The Power of Pensions: Building a Strong Middle Class and Strong Economy.

One of Carlyle’s earliest buyout funds, Carlyle Partners II, L.P., acquired Kuhlman Electric Corporation in October 1999.  Public and private pension funds accounted for 45 percent of the capital committed to that fund.  Kuhlman, which is based in Kentucky, was founded in 1894 and provides power transformers and related products to utility companies.

Carlyle managed our investment in Kuhlman through tough economic conditions resulting from California’s energy deregulation initiative, the collapse of Enron, major reductions in customer capital spending, falling wholesale prices, and the sector’s challenging credit crisis. As a result of these conditions, Carlyle valued the investment at zero.

However, Carlyle remained committed to Kuhlman. In fact, several investors and Carlyle employees personally invested additional capital to strengthen the company. Carlyle, together with management, helped turn the company around.  Nearly 10 years later, in August 2008, Kuhlman was sold by Carlyle to ABB, the global power and automation technology group, earning our investors an attractive return.For the fiscal years 2005, 2006 and 2007, Kuhlman’s revenue increased by approximately 26%, 26% and 45%, respectively. In 2007, Kuhlman experienced record results in all three of its operating divisions. In addition, Kuhlman’s overall employment levels increased approximately 25% during Carlyle’s ownership. At the time of the sale to ABB, the company had approximately 800 employees.  During the downturn, Kuhlman maintained a positive relationship with its unionized workforce, and organized labor was an important part of the turnaround.

Borg-Warner sold Kuhlman Electric to the Carlyle Group.  General H. Norman Schwarzkopf was on the board of Kuhlman Corporation before the deal frenzy began.  This is from Kuhlman's definitive proxy statement:

General Schwarzkopf is currently active as an author, lecturer and TV
consultant. He retired in August 1991 as a Four-Star General in the U.S. Army after having served as Commander in Chief, United States Central Command, Department of Defense, and Commander of Operations Desert Shield and Desert Storm. He currently serves as a director of Borg-Warner Security Corporation, The Washington Water Power Company, Remington Arms Company, Inc., and Home Shopping Network, Inc.

Did Stormin' Norman market Kuhlman to David Rubenstein in an early D.C. insider deal?  Borg-Warner's 1999 10-k stated:

The electrical products businesses acquired from Kuhlman consisted of Kuhlman Electric Corporation (“Kuhlman Electric”) and Coleman Cable Systems, Inc. (“Coleman Cable”). These businesses manufactured transformers for the utility industry and wire and cable for utilities and other industries. At the time of the Kuhlman acquisition, the Company announced that it intended to sell the businesses by the end of the year. As of December 31, 1999, the Company had completed the sales of both Kuhlman Electric and Coleman Cable. The Company received cash proceeds of approximately $227.1 million and $30.3 million face value debt instruments from the buyers of the businesses. The debt instruments were adjusted to a carrying value of $12.9 million because of their terms and credit-worthiness.
Carlyle gave face value debt of $30.3 million, revalued to $12.9 million?  That's junk debt, going for 42.5 cents on the dollar.  The 10-k had more to say about the sale.

Cash proceeds from the sales of Kuhlman Electric amounted to $105.1 million. 

Kuhlman Electric was sold to Carlyle Group, L.L.C. for a net sale price of $120.1 million, including debt securities with a face value of $15.0 million.

What about the compelling employee job numbers cited by Marchick? Kuhlman's pre-sellout to Borg-Warner showed:

Number of employees
1997 4,194
1996 2,782
1995 2,284
1994 2,375
1993 2,364

These numbers include additional divisions.  Kuhlman provided no figures specific to their electrical transformer division.  They can be deduced from Borg-Warner's employment information:

As of December 31, 1999, the Company and its consolidated subsidiaries had approximately 14,400 salaried and hourly employees (as compared with approximately 10,100 employees at December 31, 1998), of which approximately 9,900 were U.S. employees.

These numbers point to roughly 700 employees in Kuhlman's Electrical Division.  Carlyle claims it grew Kuhlman to 800 employees, a 14% increase.  A 100 person addition over 9 years equates to an annual increase of 1.5%.  Giving Carlyle their 25% claim, that's an annual employment increase of 2.8%.  How does that compare to Carlyle's investment returns, which Marchick referred to as "an attractive return."

Old stories can teach.  The question is what?  Carlyle's using Kuhlman to sell their upcoming IPO.  Carlyle's PEU ilk decimated the middle class during their decade of ascension.  Carlyle affiliate UCI's SEC filings show employment fell under PEU ownership from 6,900 in 2004 to 4,350 in 2009.

Carlyle just signed a deal for RAC, sans pension plan.   There are other stories that could be told before Congress. One is the story of Carlyle's sale of Standard Aero and Landmark Aviation to Dubai Aerospace.  Did David Marchick help that deal go through without Dubai Ports World (DPW) levels of public outrage?

Marchick can be thanked if it turns out Lenovo computers played a key role in Chinese cyber espionage.  Surely, a Congressional committee has information on Pentagon attacks by a nation state and how it was perpetuated.  It wasn't the committee providing Marchick a stand to conduct puffery.  So much remains undisclosed.

Update 7-16-22:  American University and just hired former Carlyle Group Managing Director David Marchick as Dean of AU's business school. 

Monday, July 18, 2011

Crestview: Crest Fallen USA


Mike Farrell reported Crestview Partners and MidOcean Partners, which own 42% of Insight Communications, could buy The Carlyle Group's 42% stake, given their right of first refusal.  MidOcean sports George Pataki. Which private equity underwriter (PEU) with a heavy hitter ex-politician will buy out Carlyle's stake?  Carlyle is renowned for its political connections.



White researching Crestview Partners, they recently added Western Company of Texas, a shale water play, to Select Energy Services.  Crestview's initial investment in SES came in May 2010.

The Standard Times ran a series on massive amounts of water and toxic chemicals used in shale drilling, via a technique known as fracking.  SweetH2O means sweet PEU profits.

Crestview's stake in the Barnett Shale overlaps Carlyle's.  How long before Crestview is sued for water that burns?

PEU's poision America's economic environment.  It's no surprise they foul life giving water.  Surely, the air is next.

CORRECTION 8-15-11:  The original version of this piece had Bob Rubin as a Senior Advisor for Crestview Patners.  That is incorrect.  Rubin is with Centerview Partners, not Crestview.  I apologize for this error.

Update 8-15-11:  Carlyle, MidOcean and Crestview sold Insight to Time Warner for $3 billion.

Saturday, July 16, 2011

One PEU Meets One PR


The European Private Equity Underwriters Roundtable (EPEUR) will hire a public relations firm to improve the industry's reputation.  The Carlyle Group and CVC Capital are members of the PEU association.  PRWeek reported:

Final pitches were due to take place this week, with just four agencies still in the frame. Blue Rubicon and Brunswick were said to be front-runners to pick up the six-figure account.
Brunswick Group is as global and politically connected as Carlyle.  One PEU meet One PR.

Latest Missive from PECKER Council


The PECKER Council ran its latest defense of private equity underwriters (PEU's) via Dealbook.  PECKER stands for Private Equity Capital Knowledge Executed Responsibly.

The missive came from the CEO of New Mountain Capital.  He cited the ubiquitousness of PEU's.

Today, there are more than 1,800 American-based private equity firms that vary in size, geography and expertise, operate in all parts of the country and employ six million workers.

No wonder almost every ex-politician and public servant lands a PEU job.  But how many of those six million PEU workers make the ka-ching of a Tom Daschle, Bill Frist or Evan Bayh? 

The piece highlights a number of PEU talking points, one being greater returns for public pension funds, The author failed to mention The Carlyle Group's $681 million in capital calls to CalPERS in fall 2008.  Also, it cited a "long term historical shift away from leverage."  Carlyle Capital Corporation imploded in March 2008, due to being levered 39 to 1.  He didn't state the impact of cheap money or political influence on PEU growth.

The column effectively ends with don't take away preferred carried interest taxation, what many consider to be a long term "flaw in public policy.."  The PECKER Council thinks about one thing, money and how to get more.  The piece may help private equity improve its reputation or increase interest in Carlyle's looming IPO.  Then again, it may not.

Disclosure:  The real name of the trade group is Private Equity Growth Capital Council- PEGCC.  It initially rolls off the tongue, then turns into a gag reflex.  Many react to PEU's in such a fashion.

Update 7-18-11:  An ex-business journalist wrote me, saying "I'm not sure why all the PE guys think they're being vilified! No one ever talks about it.  They really should just keep their mouths shut because as far as I can tell they've got the press and the government on their side. I think the PEU dost protest too much!"  PECKERs.

Update 8-23-11:  PECKER/PEGCC canned their CEO and is looking for a new chief pecker. Evan Bayh, Chris Dodd, even Tom Davis come to mind as outstanding candidates.

Update 3-29-12:  Ex-Carlyle affiliate Petroplus declared insolvency, a rare move for oil refiners.  How did Carlyle's PEU moves put Petroplus in jeopardy, such that they delisted their stock from the Swiss exchange and a $150 million convertible bond?

Update 8-10-22:  The PEU lobby has been recast as American Investment Council.  It's still full of peckers who successfully fought to keep its preferred "carried interest" taxation, yet again.  Blue Corporacrats showed their PEU love. 

Friday, July 15, 2011

Barclays PLC Helps PEU's Cash In


Bloomberg reported:

In what may end up being the busiest year for U.S. initial public offerings in a decade, an unlikely player has taken the top spot in underwriting: Barclays (BCS). The London-based bank is capitalizing on the return of private equity-backed firms to the public markets as companies including Carlyle Group and KKR unload some of the $1.6 trillion of assets they amassed during history’s biggest leveraged buyout boom. 

The man credited with getting Barclay's to the top is Ros Stephenson, according to Bloomberg:

The performance also owes much to the effort for more than a decade by Ros Stephenson, co-head of corporate finance, to build the private equity business of Lehman Brothers, whose U.S. operations Barclays acquired in 2008.
Which brings to mind Jeb Bush, hired as Senior Advisor to Lehman Private Equity in 2007.  Lehman never admitted to hiring Jeb in the first place.  Tracking Bush's ongoing tenure with Lehman-Barclays has the media telling different stories.

Fortune believes Bush separated from Lehman before Barclays bought its carcass.  The Hill thinks Bush is still with Barclays, as does ABC and Harvard's Institute of Politics.  Does Barclays have a PEU bird in the hand, plus Jeb in the Bush?

Wednesday, July 13, 2011

Carlyle's Rubenstein Sees Rising Health Care Costs and Major Profits

Carlyle Group co-founder David Rubenstein spoke at the Milken Global Institute on the most attractive U.S. investment at the moment:

I'll mention one.  There are others, but one you should think about is health care.  In the late 1970's the GDP of the United States devoted to health care was roughly 3%.  It's now approaching 20%.  And as the baby boomers begin to retire, and they are the wealthiest generation in our country, they will spare no expense on their artificial hips, artificial knees, their plastic surgery, their assisted living, what ever is necessary.  And so a larger and larger percent of our GDP will go into health care.  And I think investments in various parts of health care industry will do quite well in the next five or ten years.

In response to Maria Bartiromo's follow up on the impact of health reform:

I think it's going to deploy more and more federal resources into health care, that ultimately will probably not have the effect of reducing costs.  I don't think that's really going to happen.  It's going to increase costs, increase the share of GDP going into health care.
Leon Black of Apollo Management hedged on his future plans, at least what to avoid.  Black cited:

Our business is a very complicated business... High tech is a problem for an industry that makes its returns on leverage.
Combining Rubenstein and Black, I expect lots of levered health care deals.  That's where PEU boys make their money.

Update 7-14-11:  Carlyle's investment in British dental practices dealt with antitrust concerns by agreeing to sell affected local area operations.

Hospital Deal Pricing: Cerberus, KKR and Cressey & Co.


Private equity underwriters (PEU's) are legendary for buying low and selling high.  That applies to hospital beds.  KKR's HCA plans to sell Palmyra Medical Center in Albany, Georgia to the large nonprofit system in town.  The price tag is $195 million in cash for Palmyra's 248 beds.

PEU Cerberus Capital Management got 1,552 bed Caritas Christi Health System for $895 million in capital commitments.  Conceivably, the hospital system can generate much of their multi-year capital through operations.

How do the deals compare on a per bed basis?

Cerberus purchase = $576,000 per bed

HCA sale = $786,000 per bed

The $210,000 per bed difference is indicative of America's bifurcated health care system.  Struggling safety net hospitals go for a lick and a promise to remain open, while majority PEU owned beds command a 36% premium. 

After buying Caritas Christi, Cerberus' new hospital division acquired two more Massachusetts hospitals from Essent Healthcare, an affiliate of PEU Cressey & Co.  The sale price was not disclosed.

One CEO highiighted the "instant access to capital" benefits of a Cerberus affiliation.  I take it that CEO didn't have ready access to Cressey's $50 million equity commitment to Essent.

Essent-Cressey and KKR-HCA share a Frist family tie.  Tommy Frist, Jr. and ex-Senate Majority Leader Bill Frist are part of the first family of for-profit health care. Cressey had this to say about Dr. Bill's role:

Senator William H. Frist, MD is a Partner and Chairman of the Executive Board responsible for acquisitions, divestitures and oversight of portfolio companies.

That means Bill knew about the deal.  HCA Tommy's Palmyra sale is held up by a Georgia Appeals Court.  It's set for an expedited hearing on September 19.

It seems HCA's buyout of the remainder of Denver's HealthOne may get oversight.  It's paying $1.45 billion for the 40% it doesn't own of the 2,259 bed system.  HealthOne beds are priced at a premium, $1.6 million per bed.  Of course, HCA can't buy cheap without harming the value of the 60% it already owns.

PEU hospital deals are America's present and future.  Beware hell hounds gnashing their teeth at the safety net door.  Once the hell hound opens the gate, struggling hospitals can be tempted by Satan's charms.

Update 10-15-23:   Steward settled with the Justice Department over False Claim Act violation (June 2022)

Moody's Skeptical on China PEU Plays

Reuters reported:

Moody's Investors Service, responding to investor concerns, on Monday raised warnings about accounting and corporate governance risks at dozens of China-based companies.

The report comes as U.S. and Chinese officials meet in Beijing to discuss joint supervision of China-based audit firms that review U.S.-listed companies.

Accounting scandals at U.S.-listed companies based in China have been the subject of regulatory probes and dozens of investor lawsuits.
The Carlyle Group had two Chinese affiliates involved in scandals, China Forestry and China Agritech.  Seeking Alpha reported:

Fertilizer producer China Agritech (Pink Sheets: CAGC) has been delisted and resumed trading sharply lower on the pink sheets.
 Business Insider stated:

China Forestry was a billion USD Hong Kong listed Chinese company with many Private Equity funds having stakes.  The leading stakeholder is Carlyle (or more precisely funds belonging to Carlyle’s clients).  The stock has been suspended after admitting “accounting irregularities”. But it is worse than that.

China Forestry had a business model which consisted of fast-growth forestry to extract greenhouse gas credits - a business model that barely made sense to some analyst guys that looked at it.

Now China Forestry remains suspended.  No reasonable questions are being answered - so I am going to reveal to you the Analyst gossip: the bulk of the forests do not exist.  Sure they had some “front” - plantations they would take potential investors to.  But the vast bulk of the business was a fiction and “accounting irregularities” is code for “fiction”.

Oh - and Carlyle dusted $105 million.

If this is fraud then Carlyle has egg on their face.  After all - what is the point of having all those investment professionals if they get dusted by the simplest of frauds.  The whole point of private equity is that by pooling capital you can get insider positions and you can run the company for cash - for the benefit of your investors.  But if your “insider position” doesn’t even allow you to spot the business does not exist then your insider status is worthless.  You might as well close up and go home.  You have no right to be in business.
Harsh, hard hitting words.  Not the kind Carlyle wants spread heading into an IPO.

A former business reporter weighed in on private equity and China:

I can't tell if the PE guys are being insincere when they talk about China or they are actually stupid. There is no way that the Chinese govt would let American firms come in and strip cashout of Chinese companies the way they've been allowed to in the US! I imagine the Chinese welcome the PE guys because they see it as another way (through PE orchestrated mergers) to get hold of more American technology and companies and jobs.
I believe this reporter is spot on.  China and PEU's take companies public in Hong Kong or NASDAQ.  Week in China reported on "accounting tricks."

That’s because a spate of accounting frauds have beset Chinese companies with American listings.

It's no skin off China if Western investors lose.

One VC manager responded that some of the Chinese firms he’d invested in kept three sets of books.   

I understand that's true for quality reports.  One set of quality tests for the West, another set for domestic purposes.  Guess which one is export fiction?

Update 7-13-11:  WSJ reported China Forestry " is implementing a series of changes, including centralized financial reporting and hiring new management."  Good thing Carlyle got "make up ships."

Update 7-14-11: Carlyle's Chris Ullman worked hard to reverse Moody's story,  giving an update on Beijing Carlyle Investment Center L.P.  The fund raised $495 million, 64% of its target.  It received a Chinese designation that will enable it to market to social security funds.

Update 9-4-11:  Carlyle indirectly invested in China with its purchase of a British carpet maker.  Carlyle offloaded Brintons' pension to Britain's Pension Protection Fund. 

Tuesday, July 12, 2011

PEU Goes Perfusion


Last year I looked into the history of Specialty Care, a for-profit healthcare company specializing in perfusion.  Specialty Care provides the staff and heart-lung machines used in open heart surgery.  The firm started as PsiCor, became a division of Baxter, spun off to Edwards LifeSciences, bought by Fresenius, then spun off again.  Somehow AIG's private equity unit (PEU) got a stake, which ended up with Altaris Capital Partners

I tracked public deal prices and they varied widely, $80 million, $133 million, and $45 million.  Private deal prices are unknown, but debt issued under SCSG EA provides a clue.

In the last month Specialty Care raised $123 million, then bought out perfusion rival Advanced Perfusion Care  Specialty Care's private equity owners include:

Altaris Capital Partners
Petra Capital Partners
American Securities

Specialty Care's past and present are America's health care future.   Over 40 years of corporate history, bought and sold five times in the last fifteen years.

The Federal Trade Commission approved American Securities investment in Specialty Care, whose business they call "unclear."

Clearly, Wall Street and PEU's have their greedy eyes set on health care.   They expect deal fees and huge profits.  Did I mention deal fees?  PEU's breed and breathe money.  How much can your heart and lungs handle in rising health care costs?

Uncle Sam's $2 Billion Gift to Nursing Homes


The Center for Medicare and Medicaid changed a reimbursement rule regarding physical therapy in nursing homes.  As a result, nursing homes received an extra $2.1 billion in reimbursement for the first six months of the year. 

Beneficiaries of this change include for-profit nursing homes with PEU ties:

ManorCare (Carlyle Group affiliate)
Golden Living (Fillmore Capital Partners)
Genesis Healthcare (owned by Formation Capital and JER Partners)
LifeCare Centers of America (privately held)
Kindred Healthcare (with a Bain Capital board member)
Sun Healthcare (two PEU board members, RFE Investment Partners & Tri-River Capital
This group is lobbying to keep the extra money flowing until the end of the year.  Kindred showed how they changed rehab services delivery, more individual therapy sessions for more time.


Here are the health care giveaways:
$5 billion in Early Retirement Reimbursement Program
$1 billion in Medical Innovation grants
$2.1 billion in long term care rehab reimbursement
As Carlyle co-founder David Rubenstein said at the Milken Global Conference. 
Health care costs are not going down.  Guess where Carlyle is putting their money?  They're PPACA-ing it in.

Update 9-10-11:  Carlyle's ManorCare is laying off hundreds of workers.

Monday, July 11, 2011

Customized PEU Pension Accounts: MERS, Carlyle Group & AlpInvest


Municipal Employees Retirement System of Michigan, a $6.5 billion public pension fund, will invest $750 million with private equity underwriters (PEU's).  The Carlyle Group will manage $250 million in a "new managed account," while AlpInvest will get the remaining $500 million. 

Underfunded public pension funds roll the dice with PEU's to garner return.  PEU's have shed employee pension funds to make the numbers work, making MERS investment a Faustian bargain.

Dealbook reported Carlyle's purchase of AlpInvest closed last week.  Adding AlpInvest's $59 billion under management to Carlyle's $107.6 billion gets the PEU to $166.6 billion.  That figure sounds ominous.

Sunday, July 10, 2011

Milken PEU Show on Global Opportunities

When the Four Horsemen of the PEU-Pocalypse weren't chucking darts at one another, they shared statistics on private equity underwriters (PEU's).  They have nearly $1 trillion in dry powder, fund commitments not yet invested.

Fundraising improved recently, as evidenced by the time it takes to raise money for a new fund.
PEU monetizations in 2010 and 2011 aided fundraising:

The last quarter of 2010 was particularly bullish, with $64 billion in new deals announced and $72 billion in exits (setting a new quarterly record). And the early months of 2011 have been marked by blockbuster PE-backed IPOs, including HCA, Kinder Morgan and Nielsen.
Investors rolled over at least a portion of proceeds into new offerings.  New fund foci include:

As for new areas for PEU investment, Rubenstein shouted health care. Carlyle owned MultiPlan, a PPO that specialized in controlling health care costs. Carlyle flipped Multiplan for a triple, which helped drive up costs. Rubenstein sees continue cost increases as far as the eye can see, but he also projects big PEU profits.


The video is worth a look for anyone with an hour and fifteen minutes to spare.  The laugh track is pretty good.  PEU boys can deliver their lines.

Obama's JP Morgan Crew


President Obama's Chief of Staff William Daley and Deputy Chief Nancy-Ann DeParle share a JP Morgan work history.

White House Staff
Daley jumped from JP Morgan to the White House, while Nancy-Ann took a more circuitous route.  Nancy-Ann worked for JP Morgan's private equity division, JP Morgan Partners.  When Jamie Dimon's BankOne merged with JP Morgan, it had OneEquity, also a private equity underwriter (PEU).  Dimon waited two years to ascend to the top at JP Morgan.  When he did, Nancy-Ann's JP Morgan Partners was shown the door.  It became CCMP Capital Partners.  DeParle worked as Managing Director of CCMP until her White House health czar appointment. 

Both got the nod in January of this year.  Early January found Daley replacing Rahm Emanuel, while Obama promoted Nancy-Ann from her health czar slot.  The Guardian suggested the move lent "the White House a more business-friendly face." William Daley and Nancy-Ann DeParle are very business friendly.

Both trace their personal riches to corporations.  William Daley filed to sell over $8.2 million in JP Morgan stock earlier this year.  It's not clear what he did with his Boeing shares or other holdings.  Nancy-Ann DeParle made millions from serving on for-profit health care boards, the sale of Triad Hospitals to CHS and from her work at CCMP, which holds a number of health care companies.  CCMP will flip CareMore, where DeParle served on the board, in an $800 million sale to WellPoint.

Nancy-Ann's health reform goes a step further, it's PEU friendly. Why hasn't the White House fulfilled my request for Ms. DeParle's financial disclosure forms?  The 2009 version is available online, but nothing afterwards.

Update 7-19-11:  JPMorgan received nearly $7 million in health reform's ERRP cash.   With earnings of $5.4 billion in the second quarter, does JPMorgan need Uncle Sam's ERRP cash?

Saturday, July 9, 2011

Not Driving Down Healthcare Costs: Blackstone & KCI


Bloomberg reported:

at least two private-equity firms were in discussions with KCI on a possible sale of the company for more than $5 billion.
KCI makes wound care products.  WSJ narrowed the race to Blackstone Group, a private equity underwriter (PEU) associated with Stephen Schwarzman and Peter G. Peterson.  Blackstone recently milked for-profit hospital company Vanguard Health Systems via debt for dividend before taking Vanguard public.

After the WSJ story, KCI's stock rose 15% on the day.  It's up 58% on the year.  Oddly, City of San Angelo early retiree dependents saw their health insurance premiums rise 58%, despite the City's participation in PPACA's Early Retiree Reinsurance Program.

How will a $5.5 billion KCI sale lower rapidly rising health care costs?  KCI's 2010 10-k shows a $3 billion balance sheet.  Growing it to $5.5 billion is an 83% increase.  KCI had $2 billion in revenue, making the standard 2% PEU management fee $40 million a year.

Blackstone would steer KCI's cash flow toward interest payments on $4 billion in debt and management fees.  KCI's high margin business would need to increase to cover PEU costs.

There is no bending the curve on PEU capital costs for healthcare raids.  That curve must be bent elsewhere, by cutting research & development, salaries and benefits, and offshoring jobs/production.


It's the PEU way.

7-14-11:  Apax Partners and two Canadian pension funds won the PEU race for KCI.  Including assumed debt, the deal is worth USD 6.3 billion.

March of the Carlyle IPO


Dealbook reported The Carlyle Group closed on AlpInvest, a $43 billion fund, which brings Carlyle's assets under management to $150 billion.  The private equity underwriter (PEU) is shopping for other assets, including an energy focused PEU:

Carlyle’s potential acquisition of Energy Capital Partners underscores the relentless drive by the firm to gather more assets and broaden its product line as it gears up for an initial public offering.
Energy Capital Partners invests in power plants and energy pipelines.  Carlyle had an energy joint venture partner in Riverstone Holdings.  Dealbook implies Carlyle proposed to Riverstone, which said no.

Carlyle and Riverstone, which have co-sponsored six energy and power funds over the last decade, notified their investors in a letter sent last week that they would not raise another fund together and would go their separate ways. Riverstone’s partners have decided to stay independent.
Riverstone's Lord John Browne has been historically difficult to nail down.  Club insiders look after their own.

Dealbook referred to two Carlyle failures in 2008:

During the financial crisis, two of its homegrown hedge funds — Carlyle Capital and Carlyle Blue Wave — collapsed after wrong-way bets in the debt markets.

Carlyle Capital Corporation was based in Guernsey (off the coast of France).  How is that homegrown?  Also, CCC's failure contributed to the financial crisis.  It was the canary in the coal mine.  FT reported in March 2008, six months prior to September meltdown:

Carlyle Capital Corporation (CCC) is to be wound up after the $22bn Amsterdam-listed mortgage fund said its shareholders had approved an application for a court appointed liquidator to sell its remaining assets.

Dealbook noted Carlyle's partner in criminal settlements, the aforementioned Riverstone Holdings

Carlyle and Riverstone both became ensnared by the New York attorney general’s investigation of corruption of the state’s public pension fund by political officials and private equity funds. Carlyle paid $20 million and Riverstone paid $30 million to resolve their roles in the case.
The total Carlyle-Riverstone placement fee (bribe) settlement came to $70 million, when Riverstone's founder is included.

Dealbook said nothing about Monument Capital, a Carlyle loaded private equity underwriter focusing on security firms.  One look at Monument's advisory board shows major Carlyle players.  Monument looks like a Carlyle Group franchise.

Given Carlyle's diversification with Claren Road (hedge fund), Emerging Sovereign Group (developing market PEU), AlpInvest and talks with Energy Capital Partners, FT's 2008 assessment is worth revisiting:

Its strategy (CCC) was undone by the turmoil in the mortgage markets, dealing a heavy blow to the reputation of Carlyle, one of the world’s biggest private equity groups, and raising questions about whether it became too diversified.
Three PEU leaders mentioned in the piece recently gathered at the Milken Institute Global Conference. 

It was a hoot seeing private equity mavens snark at each other.  Ever the competitors and salesmen, those PEU boys.  As for Carlyle's IPO, their co-founders can rocket up the global billionaires list.  Isn't that what it's all about?  Big money, bigger egos.

Update 8-23-11:  Dealbook reported on Claren Road's origins and a number of fund unwindings.

Friday, July 8, 2011

Business Writing in a PEU World


A former financial reporter (think Bloomberg, FT, WSJ) kindly shared their thoughts on private equity.  Here are a few observations:

The PEU Report is absolutely brilliant and has given me faith that someone out there has noticed what is going on in the world.

There are very few people out there who will talk and write honestly about private equity. I know from personal experience that the financial press is so eager to break news on "deals" that reporters (who are increasingly compensated on the number of "market moving stories" they write) can't afford to be critical of Carlyle, KKR and Blackstone, and risk losing access to people at those firms.
I found it interesting how pay for performance in financial reporting distorts what stories are told and how.  Rewards punish and suboptimize quality, even in business storytelling.  Here is such an example:

I can remember Bloomberg's private equity reporter - who you featured in a recent blog photo - going on TV to talk about the HCA dividend and calling it a "liquidity event." The reporters are trained by the PE firms' PR people to use language that they find acceptable. Wouldn't want to say they're "cashing out." I've never seen anything like it before.
The reach and damage inflicted by private equity's greed is taboo:

I have seen so many people -- particularly those in their 50s - 70s -- taken apart by what has happened in their industry as greed has hollowed out the economy. These are people took pride in their jobs and held themselves to this invisible standard that we all just took for granted, but is being wiped out.

The Carlyle Group scares me more than anything I've ever seen on Wall Street. It seems to exist to corrupt politicians and it's hard to know who they even represent.

I watched a video interview of (David) Rubenstein and his arrogance is really beyond tolerance. He was going on about the debt ceiling problem and how there would need to be cuts in services and higher taxes. When the reporter asked him about tax on carried interest he turned really disdainful and said that this "only" amounted to $22 billion over some number of years and this was not serious money. Boy, nothing like everybody doing their small part to save the country from oblivion!
Not to mention Carlyle's use of offshore corporations to hide taxable profits.  Carlyle co-founder Rubenstein always seems to be in sales mode.
I liked this (Rubenstein) comment:

"(W)hen the Great Recession hit, stocks went down and private equity valuations went down. Now private equity never said that we are absolute return: markets go down and we go up. Our theory is if the public markets go down by X percent, we go down by less. Public markets go up by Y percent; we go up by more because the theory is that private equity is better than the public markets. If it weren't, people wouldn't invest with us, right? So, what happened was when the private markets went down, a lot of people were nervous about their stocks and a lot of people were nervous about their private equity valuations."

Good thing Carlyle had control over how they presented the valuations to the market! Also, didn't they have some money market type mortgage funds that fell off a cliff? So much for a great track record as asset managers.
As for their track record, Carlyle lost Carlyle Capital Corporation (mortgage backed securities fund), Blue Wave Partners (hedge fund), and eight other affiliates. These are conveniently omitted from Carlyle's pre-IPO sales pitch, which includes video.

I watched a few minutes of those Carlyle videos.

All I can say is that when people have too much access to cheap capital (thank you Greenspan and Bernanke) they tend to develop a very inflated sense of their real worth. First it was Mozillo over at Countrywide "spreading the American Dream." Now, the PE guys are "creating value" everywhere they go!
Don't forget private equity's role in innovation.  I'm not sure how a century's worth of discoveries occurred without PEU's.  They only became ubiquitous in the seven years.  Carlyle's major innovation was locating in Washington, D.C., the home of purchased politicians and a $3.5 trillion budget.

PEU's pit countries against each other, jockeying for lower taxes and softer regulation. Dealbook offered the PEU divide and conquer pitch, which got a reaction.

I can't tell if the PE guys are being insincere when they talk about China or they are actually stupid. There is no way that the Chinese govt would let American firms come in and strip cashout of Chinese companies the way they've been allowed to in the US! I imagine the Chinese welcome the PE guys because they see it as another way (through PE orchestrated mergers) to get hold of more American technology and companies and jobs.

What is going on with the theme of the article that these guys never agree with each other? As if there are these deep philosophical differences in how they operate?!? Makes one just despair.

Watching the Milken Institute panel discussion, the disagreement seemed more snarky and personal.  The Four Horsemen of the PEU-Pocalypse may not like riding together.  But they do so for greed and plunder.

Update 9-21-12:  Carlyle co-founder Bill Conway worries that China may shut out foreign PEU's for local.

Update 4-13-14:  Ashleigh Rogers of Seeking Alpha gave The Carlyle Group a thumbs up, thus improving the odds of her landing a David Rubenstein interview.

Update 5-1-14:  Bloomberg decided selling terminals was more important than investigative financial journalism.

Update 3-22-15:  Yale interviewed David Rubenstein in 2013 that is worth a listen in light of the above themes.  He avoids his and Carlyle's role in decimating the middle class.

Update 6-3-15:   Those harmed by the hollowed out economy spoke up in response to a silly piece in the WSJ asking why consumers failed to spend.

Update 8-4-15:  People may be ready to hold our abysmal leaders accountable for hollowing out our economy for their outsized gains, money and power.

Update 4-22-17:  Here's how greed has hollowed out the economy and decimated America's middle class.

Update 12-5-19:  The greed and leverage boys hollowed out residents of Sidney, Nebraska.  Fox News Tucker Carlson did a story about their town and how they were undone by a big Sasse donor.  Senator Ben refused to comment.  Loneliness

Update 3-16-22:  New Yorker reported:

Freedom House, a Washington think tank, has described the use of tax havens and other hidden maneuvers as a “multifaceted threat to democratic governance.” The efforts to escape an ordinary obligation of citizenship, while sometimes legal, “hollow out public services, and they fuel populist resentment by magnifying the perception that the system is rigged in favor of wealthy elites,” the group declared. Over time, they “set a country on a path toward institutional breakdown or even state failure.”

Update 4-26-23:   CNBC reporter Hadley Gamble was romantically involved with TPG founder David Bonderman.  Is nearly every business reporter a PEU concubine?

Update 6-17-24:  FT ran a story titled:

"Private equity firms have amassed $1 trillion in ‘carry’ fees as taxation debate mounts"

That's serious money. 

Update 9-18-24:  Rubenstein is now a PEU legend.  His Bloomberg Audio interview has a number of startling admissions.

...let’s get members of Congress to come and sit with each other from different parties in different houses, which they rarely get a chance to do. No press. Nobody can see ’em talking to somebody who’s a different member of a different party. And that’s been going over 10 years. 

And what do these members of Congress know about Carlyle?  Here's another Rubenstein admission:

Later I went out and recruited big names who had been in government, people like former Secretary of State, Jim Bakker, former Secretary of Defense, Frank Carlucci. And that gave us a certain allure because people were wondering what are they doing in an investment firm? 

Update 9-19-24:   No Presidential candidate (Trump or Harris) has talked about PEU preferred "carried interest" taxation this election cycle.  The Great Acquiescence has arrived.  PEUs are now part of our national DNA.  Thanks Carlyle for making secrecy and greed our unstated national values. 

Thursday, July 7, 2011

Four Horsemen of PEU-Pocalypse


Four prominent private equity underwriters (PEU's) spoke at the Milken Institute Global Conference, which offered a Currency of Ideas.  The "Global Opportunities in Private Equity" panel included:

David Rubenstein of the Carlyle Group, Jonathan Nelson of Providence Equity Partners, David Bonderman of TPG Capital and Leon Black of Apollo Global Management
Dealbook reported:

The panelists conceded to the host, CNBC’s Maria Bartiromo, that the United States government had ultimately concluded that private equity was no longer considered a bogeyman. Still, they were piqued by a slight implication in the Dodd-Frank legislation that private equity still bore some systemic risk.
Piqued at the slight implication?  I guess Rubenstein forgot about Carlyle's $681 million in capital calls to CalPERS in fall 2008.  At least they admitted financial regulatory reform gave private equity a virtual free pass.  Carlyle's Boston Private took $153 million in TARP money to survive.


The world's quality guru, Dr. W. Edwards Deming, spoke in 1984 about an economy without takeovers, without leveraged buyouts (LBO firms).  LBO morphed into private equity before exploding the last decade.  Greed is their constancy of purpose, evidenced by 30% annual return targets.

Carlyle and company are beyond boogeymen.  They're the Four Horsemen of the PEU-Pocalypse, ready to plunder America.

Update 4-26-15:  Dr. Deming said his message came down to one thing, the human spirit.  PEUs and their horrific management practices can be seen in a powerful story of how management crushes that very thing.  

Update 7-28-15:  Bad management theory resulted in excessive executive compensation at the expense of everything else.  I can hear Dr. Deming bellow, "Will they ever learn?" 

Carlyle's Rubenstein & Washington Kastles


WaPo's Capital Business buzzed:

Many local business moguls, such as Carlyle Group co-founder David Rubenstein and former AOL chairman Steve Case, have been seen courtside during past seasons.
That's not a court of justice, where David Rubenstein might testify as to his actions to save 25 patients who expired in Hurricane Katrina in Carlyle's LifeCare Hospital in New Orleans.  It's a tennis court, where Washington's Kastle franchise plays World Team Tennis. They have new digs on the Southeast waterfront.

Should the Kastle's new tennis stadium end up flooded like the Superdome, Rubenstein is the man to approach for advice.  Carlyle's hospital with the highest patient death toll in Hurricane Katrina warranted not one mention in the Bush Lessons Learned report.  Come to think of it, the White House looks like a castle, where David Rubenstein is a frequent visitor.

Update 7-31-11:  Capital Buzz reported on "Billionaires Row" at Washington Kastles stadium.   They sit in fully catered dream seats.  I envision them waited on hand and foot by D.C. politicians.

Congressional Debt Default Theater?

Those who quivered in fear when Lehman Brothers failed threaten to unleash a greater monster with a U.S debt default. 

Lehman Brothers had $370 billion in debt when it failed, the U.S. Government has over $14 trillion.  The explosion in the financial markets could be 40 times Lehman.  There would be no Uncle Sam for Wall Street to run to. 

America's leaders are either stupid beyond measure or this is political theater, which means they believe voters are stupid beyond measure.

Wednesday, July 6, 2011

TPG to Buy Immucor for nearly $2 Billion


Bloomberg reported:

Immucor Inc. (BLUD), the leading maker of tests to screen blood before transfusions, agreed to sell itself to private-equity firm TPG Capital for $1.97 billion.
 CNBC reported on one hedge fund winner in the TPG deal:

ValueAct Capital, which is Immucor's biggest shareholder, said it supports the transaction. ValueAct is hedge fund that owns 8.9 million shares of Immucor, or 12.7 percent of the company.
And how long has ValueAct owned their stake?  They purchased 3.9 million shares or 5.6% and 756,000 or 1.1% of the class in October 2009, after a precipitous plunge in Immucor's stock price.  A portion of Immucor went to two ValueAct funds based in the British Virgin Islands.  ValueAct bought their second chunk of Immucor in December 2009, with the next coming in February, April, and May 2010.  By last summer ValueAct held over 12% of the company.

When did management and the board start shopping the company?  What role did a hedge fund in encouraging Immucor management to sell out to a private equity underwriter (PEU) at a 30% premium to its stock price?

Immucor has total assets of $597 million.  The purchase price is 3.3 times assets.

There is no information on the amount of debt TPG will float to fund the deal,odd given private equity underwriters use of leverage to fund deals.   A 2% management fee on Immucor's $330 million in annual sales comes to $6.6 million.

Bloomberg added Immucor "offers industry-topping operating margins of 39 percent as well as steady cash flow."  Will TPG sop up Immucor's cash flow and tax liability with interest charges and management fees? Margins will need to grow to cover PEU associated costs.  That means higher prices for customers, cutting non-PEU associated costs like salary and benefits, and finding new markets (which may offer lower production costs, like China).

TPG Capital believes in the growth opportunities presented by our molecular immunohematology offering and by our expansion into new markets around the world.

TPG's Immucor buyout is one of thousands in the health arena.

There have been 2,295 announced or completed acquisitions for health-care products makers in the last five years, according to data compiled by Bloomberg. The companies sold for an average size of $212.6 million and an average premium of 35 percent.
What role have buyouts and associated capital costs played in soaring  health care costs? That question is never asked, much less answered on Capital Hill, where the Reds and Blues love for-profiteers and PEU's.

HCA's PEU owners bled the company for $4.25 billion in dividends before taking it public.  TPG struck a deal with Immucor (BLUD), which screens blood.  Will the company develop a test for PEU dividend bleeding?  Doubtful.  I think that's an internal metric for private equity underwriters, one they don't like to publicly share.  Turn your eyes, nothing going on here...