Carlyle's Dynamic Offshore Resources to Go Public

The Carlyle Group and energy joint-venture partner Riverstone Holdings are ready to monetize Dynamic Offshore Resources.  The company commenced operations in 2008. The S-1 stated:

Dynamic Offshore Resources paid Riverstone a management fee of $1.1 million, $1.5 million and $1.5 million during the years ended December 31, 2009 and 2010 and the six months ended June 30, 2011, respectively.

Why the management fee acceleration for 2011?  Does it have anything to do with Riverstone and Carlyle's divorce?

How do investors stand to profit in the IPO?

Aggregate capital contributions to DOH were $174.0 million, $23.3 million and $28.6 million for the years ended December 31, 2008, 2009 and 2010, respectively. There were no capital contributions during the six months ended June 30, 2011.

DOH paid distributions to its limited partners in aggregate amounts of $33.0 million, $48.3 million and $12.5 million for the years ended December 31, 2009 and 2010 and the six months ended June 30, 2011, respectively.

That's $225 million in, $94 million out.  A $400 million IPO would send investors into the clear by $269 million.  That's easily a double over three years, with the potential for more if investors retain shares.

Carlyle pulled Stark's IPO due to a dire financial environment.  DOR's remains on track with an S-1 filing.  Carlyle's IPO documents are due to the SEC in September, possibly days away.  Beware the puffery.

Update 9-1-11:  Carlyle's China Forestry restarted logging operations and trading timber logs.  The company's stock is suspended while under investigation for accounting irregularities, relating to a $35 million embezzlement.  Will this resumption of operations help put this black mark behind Carlyle as their IPO marches forward?  Carlyle's DBD co-founders, want to cash in.  PEU salesmen par excellence....

Update 2-1-12:  Carlyle shelved the IPO and is selling Dynamic Offshore to SandRidge Energy for $680 million in cash and 74 million shares of SandRidge, currently trading at $8 per share.  It's nearly a four bagger for Carlyle when special dividends/distributions of $137 million are included.

Tony Hayward's PEU Life

Ex-BP CEO Tony Hayward has his life back and he's on top.  Bloomberg reported:

A year after leaving BP, he’s again at the helm of a publicly traded company. He teamed up with financier Nathaniel Rothschild, scion of the banking family, to create Vallares Plc, a shell company that raised 1.33 billion pounds ($2.15 billion) through an initial public offering on the London Stock Exchange on June 17. 

Valleres Plc focuses on the oil and gas sector.  Here's the board's take:

The Directors believe that increasing global industrialisation and urbanisation, particularly in Asia (outside Japan) and the emerging markets, is likely to lead to increased global demand for commodities. At the same time, the Directors believe that the supply of oil and gas will be constrained by insufficient investment to keep pace with this demand and by exploration and development challenges. This supply-demand dynamic is likely to generate sustained inflation in commodity prices.

Hayward stated Vallares would follow the same model as Vallar, a prior Rothschild investment:

"Vallar PLC is a proven success and it is clear that the concept applies equally well in the oil and gas sector.  Many high quality international resource assets have been acquired by family owned or private companies in the last few years. We will have the cash, access to funds and the capability to unlock value where the current owners have neither the capital nor technical expertise to develop the assets."

Rothschild weighed in on landing Hayward:

"We have assembled a high quality board, with great expertise, to build a significant London listed resources company focused on the oil and gas sector. I am delighted to be partnering with Tony Hayward, whom I have known for many years, on this exciting new venture. Together, we believe the company is well positioned to capture value in a sector with attractive fundamental supply-demand dynamics."

Nathaniel Rothschild wasn't alone in giving Tony a chance to make millions.

Hayward also serves on the board of TNK-BP International Ltd., BP’s fractious Russian joint venture. Glencore International Plc, the mining and commodities-trading company that went public in London and Hong Kong in May, raising $10.3 billion, named him its senior nonexecutive director. 

Tony landed a spot on Glencore's board on April 14, 2011.  Hayward chairs Glencore's Nominations Committee.  Here's the laugher, Hayward sits on the Environment, Health and Safety Committee.  Hayward is the second-highest paid board member (non-executive), garnering nearly 160,000 pounds per year.

And Hayward advises AEA Investors LLC, a New York-based private-equity firm that manages $5 billion in investments, and Numis Securities Ltd., a London investment bank, on energy companies.

Hayward is a partner with AEA Investors LLC, according to Glencore's IPO prospectus.  The TimesUK reported:

It remains unclear as to how much Hayward will earn at the 43-year-old private equity group, which was established to manage the fortunes of the wealth of the Rockefeller, Mellon and Harriman families.

Tony Hayward, private equity underwriter (PEU) for Robber Baron money.  That's rich, given PEU's are the new Robber Barons, Schwarzman, Rubenstein and now Hayward,

Tony also sits on MIT's Energy Advisory Board and the British Olympic Advisory Board.  He is a Fellow in the Royal Society of Edinburgh.

The landed gentry forgave Tony Hayward, as they forgave Lord John Browne and Wilbur Ross.  Who yachts in the Gulf of Mexico anyway? 

BP's Oil Spew antagonist Tony Hayward came out better than the Barney Fife-like protagonist Thad Allen.  However, each were handsomely rewarded after their respective roles.  It adds up to lots of PEU.

Update 10-8-11:  Hayward's Vallares did a deal with a Turkish oil company that has fields in Northern Iraq.   Lives sacrificed, Hayward's treasure:  It's a pattern. 

Hurricane Irene Impacts Repo Men?

“Financial crises are almost always and everywhere about short-term debt,” says Douglas Diamond of the Booth School of Business.

Combine this fact with a current disaster, Hurricane Irene.  Bloomberg reported:

Rates for borrowing and lending securities in the repurchase-agreement market rose and investors sought to extend maturities on concern power outages and closings of mass transit will keep traders home after Hurricane Irene strikes.

No traders, no repo refinancings.  A few missing traders isn't anything near the powder keg of 2008.  However, Uncle Sam did his best to refill the gunpowder barrel with $13 trillion in financial interventions.

Hurricane Irene impacted repo financing in the near term.  Combined with other shocks, things could get interesting.  IMF Chief LaGarde said European banks needed to be recapitalized.  Didn't that already happen? 

Stark IPO Landscape

Carlyle Group affiliate H.C. Stark targeted an autumn IPO.  Reuters reported a change in plans.

Recent financial market turbulence has dealt a serious setback to plans to list German specialist metals and ceramics company H.C. Starck this year, three people close to the situation said on Friday.

"A listing this year is becoming increasingly unlikely," one of the people familiar with the process told Reuters. A sale of the business remains an alternative, a second person said.

The Carlyle Group plans to go public this year, with an S-1 filing in September.  How will market turbulence impact Carlyle's IPO?  How about declining PEU marks?  Stay tuned.

America's Bio Fund

OilPrice.com reported:

On 16 August President Obama announced that the U.S. Departments of Agriculture, Energy and Navy will invest up to $510 million by 2014 in partnership with the private sector to produce advanced “drop-in” aviation and maritime biofuels for military and commercial use.

Private equity underwriters (PEU's) love Uncle Sam's premium priced business, but cheap capital drives them crazy.

The plan envisages the three federal departments to invest a total of up to $510 million, which will require substantial cost sharing from private industry, with projected matching funds of least one to one.

Lining up are the usual suspects:

Wall Street's big money boys, the Carlyle Group and Goldman Sachs, have already begun discreetly investing in biofuel production in the U.S.

This explains government's prominent role in the upcoming Clean Energy Summit, as reported by Economic Policy Journal.  Here's why private equity is interested:

The small amounts produced thus far of drop-in biofuels, the majority of which have gone to both civilian airlines and the Department of Defense for evaluation and testing have been labeled “designer” fuels, as their prices are multiples per gallon higher than traditional fossil fuel, which depending on the feedstock, have ranged between $65 and $100 per gallon.

PEU's can sense a cash trough. Navy Secretary Ray Mabus said this week

“While it’s not a competitive rate yet, simply because it’s not a big enough market, we believe that if you do create this market, which we are capable of doing, the price will be competitive with petroleum.”

Finance it and they will come. At least that's the DoD's take:

“We used the Defense Production Act, which says that if you have an industry which is vital to national security that is not existent in the United States, that the government can step in and partner with private business in order to get that sort of business up and running,” Mabus said.

The Navy, Agriculture and Energy departments are contributing about $500 million in “already-existing money,” Mabus said, to purchase materials from businesses that can help to establish the new industry. Among those potential purchases are contract proposals for 450,000 gallons of biofuels for Navy research and development. It will be one of the largest biofuel purchases made in the United States.

Navy Secretary Mabus knows PEU's. 

World PEU Fundraising

Private equity underwriters (PEU's) raked in investments for "winning" areas of the globe.  Six month fundraising figures show:

China - $10 billion (3 times 2010)

Brazil -   $3 billion  (4 times last year)

India -   $2.5 billion (up 1.5 times)

Going the opposite direction was Middle East/North Africa.  The Arab Spring wrung out billions from PEU's.  Last year's $3.4 billion faucet turned into a $91 million drip.  Was it a lack of dictator cash, nervousness amongst wealthy citizens or did the risk trade dry up?

Emerging markets PEU fundraising is the highest since the second half of 2008.  How much of that $29 billion came from capital calls?

The PEU boys from EMPEA have the funds to court the girl from IPANEMA. 

Board Member Tom Davis (Retired R-VA): Lax or Vigilant

Retired Representative Tom Davis (R-VA) is an executive conundrum.  Chris Ward's embezzlement scheme began with Davis as Chair of the National Republican Congressional Committee (NRCC).  The investigation placed no blame on a somnambulist NRCC Executive Committee, effectively the board of dirctors.  The NRCC allowed Treasurer Ward to wire money with only his signature.  Ward's pilfering began under Davis' watch.

Davis retired from the U.S. Congress after 14 years of service, landing the Director of Federal Government Affairs position at Deloitte & Touche LLP.  Oddly, a Chris Ward worked as chief executive of Deloitte's corporate finance operations in the Middle East.  That Chris Ward had no work history prior to September 2008 in his LinkedIn profile.

Davis currently sits on three boards, Agilex Technologies, The Partnership for Public Service,  and InfoZen.

Agilex Technologies, established in 2007, is a government information services contractor.  Their bio on Davis is the only one to acknowledge his NRCC role:

Congressmen Davis’ vigilant oversight of federal contracting saved millions of taxpayer dollars. He also served as the chairman for the National Republican Congressional Committee.

Davis' oversight didn't extend to the NRCC, given the five year embezzling scandal started under his Chairmanship.

Oddly, Tom Davis' Deloitte job has him advising clients "on major trends, opportunities and challenges facing the federal government, with a specific focus on technology innovation and government transformation."  Transformation is the job of Davis' second board seat. 

The Partnership for Public Service "works to revitalize our federal government by inspiring a new generation to serve and by transforming the way government works."  

Their bio on Davis shared two other roles, President and CEO of Republican Main Street Partnership and adjunct professor at George Mason University.  He's inspiring a new generation of hyper-competitive politics.

Davis' third board seat is with InfoZen, another government contractor in the information space.  InfoZen brags of two Deloitte rankings on their website.  His InfoZen bio highlights his time as a member of the Fairfax County Board of Supervisors.

How do the themes of information and transformation apply to the untold Chris Ward-Tom Davis story?  Is the Deloitte UAE Chris Ward the same man who robbed Republican coffers?  If so, what information did Ward have that encouraged power players to treat him gingerly?

Embezzler Ward was sentenced in early 2011.  Where is he incarcerated?  Does Tom Davis visit?  When will Chris Ward's criminal story be told?  Will his version call Davis lax or vigilant?

Update 8-23-11:  Another embezzler was sentenced to prison for not reporting her ill begotten gains to the IRS, tax fraud.  Will Chris Ward get similar tax treatment?

Thad W. Allen's Finmeccanica Board Slot

 

Retired Admiral Thad W. Allen was appointed to SELEX Galileo's Board of Directors.  The appointment came one year and six days after the BP's Deepwater Horizon exploded in a massive fireball, killing fifteen people.  SELEX Galileo is a division of Finmeccanica and the company's core competence includes unmanned aerial vehicles.  SELEX's press release stated on Thad's appointment:

Allen's distinguished career includes leading the federal response and recovery efforts in the aftermath of Hurricanes Katrina and Rita in 2005, when he served as the principal federal official as well as the Coast Guard chief of staff.

Oddly, Frances Townsend also played a key role in Hurricane Katrina, crafting the abysmal White House Lessons Learned report.  After Fran left public service, she too was appointed to the board of a Finmeccanica subsidiary, DRS Technologies. 

Most recently, Admiral Allen managed the response to the Deepwater Horizon oil spill, when he was appointed by the White House as the national incident commander, a position he continued to serve after his official retirement from the USCG in June, 2010.

Thad fused the BP job with obfuscation and double talk.  Here's his take on his board slot with SELEX Galileo:

“The enduring challenge of maintaining technical superiority in the acquisition and fusion of intelligence, surveillance, and reconnaissance information in an era of diverse global threats is the focus of SELEX Galileo's business. I look forward to working [those challenges] with the team,” said Thad Allen.

Thad was consistently late with and short on information on the BP Oil Spew.  Word had it OMB, i.e. Peter Orszag controlled the Thadster.  While Orszag went to Citi, Thad landed with RAND.  They still meet around a teak board table at the Partnership for Public Service.

Finmeccanica likes incompetent ex-Homeland Security officials who blame unprecedented events.  Fran Townsend omitted the hospital with the highest Katrina death toll from her report, while Thad couldn't ever get skimming down, despite a tutorial. 

Fran's board slots started slow, but accelerated.  Thad's private sector profitgasm could do likewise.  Stay tuned.

What if Mr. Potter Started Bedford Falls Foundation?

Carlyle Group co-founder and private equity underwriter (PEU) William Conway established the Bedford Falls Foundation.  Conway and his wife gave $5 million to Washington's Capital Area Food Bank to construct a new building.  The facility will be called the Bedford Falls Foundation Food Bank Distribution Center (BF3-BDC).

As a longtime fan of the movie It's a Wonderful Life, Mr. Potter, George Bailey and Bedford Falls/Pottersville came to mind. I pondered Conway's movie character, given Carlyle's loading companies with soaring interest expense and management fees.  Those increased costs often supplant U.S. jobs in a Potter-like manner.

A former business reporter shared their take on Conway and company.

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 Rubenstein (Conway's partner) 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!

Conway's $5 million gift came with a Carlyle charge of leverage, potentially as high as 25 to 1.

Conway is providing $5 million to serve as equity so the charity can borrow or raise $125 million more from individual donors, city government, banks and commercial lenders. It's the same financial leverage model that made him worth $2.5 billion, according to Forbes magazine, and may potentially build 1,000 homes. 

Fortunately, the Capital Area Food Bank eschewed debt in leveraging the $5 million into a $37 million fundraising total. 

William Conway gave $15 to 20 million to the Bedford Falls Foundation after seeing the faces of the less fortunate on D.C.'s streets.  This revelation came before the fall 2008 financial crisis, which created legions more struggling citizens. As a percentage of Conway's $2.5 billion, $20 million amounts to 0.8%.

How long before the coming 125,000 square foot facility is overwhelmed by Pottersville people?  As a modern day, PEU "robber baron," William Conway cares.  The question is how much?

Update 8-23-11:  Enough to donate another $1 million to the BF3-BDC, which distributed a record 30 million pounds of food this fiscal year, up from 27 million last year.  The food bank went $1 million over budget last year.

Update 8-26-11:  Carlyle will invest in affordable housing in India.  Will they build homes like Bedford Falls or Potterville? A similar opportunity exists in Tunbridge Wells.

Update 1-31-22:  PND reported "Conway originally had planned to donate $1 billion to create jobs for low-income people, but when he solicited ideas for how to go about it last fall, he received more than twenty-five hundred suggestions. Ultimately, he determined that the greater need was to help the poor qualify for jobs that already existed. "I concluded out of all this that it was extremely difficult to create jobs," Conway said. "The objective I get to is similar, but I never thought I'd actually get there this way."

Co-Chair Reilly's Oil Spew Penalty

William Reilly suspended his membership on the ConocoPhillips board of directors while co-chairing Obama's BP Oil Spew Commission.  Reilly did not dispose of his $2.2 million in ConocoPhillips stock holdings, even though Conoco is a joint venture partner with BP in the Gulf of Mexico and an Alaska natural gas pipeline.

Reilly forfeited $50,000 in ConocoPhillips Board compensation relative to other directors.  Despite that Reilly received $180,355 for his half year board service.

Mr. Reilly elected to take a leave of absence from his position as a Director of ConocoPhillips while serving as co-chair of the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling (the Commission). Following deliberations, the Commission issued its final report on January 11, 2011. On January 12, 2011, Mr. Reilly returned from his leave of absence and resumed active service as a Director of ConocoPhillips. As a consequence of his leave of absence, Mr. Reilly received no compensation during the period from July 2010 through December 2010. 

His return came just in time for the full 2011 stock award, which occurred on January 15. Three days after rejoining the board, Reilly received 2,526 restricted stock units which convert to ConocoPhillips stock on a one for one basis.  It was worth $170,000 at the time of the grant. 

Conoco drove margins up 82% after Reilly did his volunteer duty:

ConocoPhillips earned $17.09 per barrel of oil in the second quarter, up from $9.38 in the year-ago period. 

Reilly looked annoyed at Rachel Maddow for pushing his potential conflict of interest last June.  It cost him $50,000, a sum most private equity underwriters wouldn't leave on the table. 

Co-chair Reilly did control how BP and ConocoPhillip's Tiber Field in the Gulf of Mexico would be developed.  That's worth something to both companies. 

Nancy-Ann DeParle & Rick Scott's Financial Conflict of Interest

Democratic President Obama's Deputy Chief of Staff and former Health Czar Nancy-Ann DeParle made millions from her stake in for-profit hospitals and healthcare companies, much like Republican Governor Rick Scott of Florida.  A portion of DeParle's profits came from Triad Hospitals, a spinoff from Scott's HCA. 

As public servants,  Scott and DeParle needed to dispose of potentially conflicting assets.  Rick Scott put his assets in a trust in his wife's name:  Legal experts said Scott complied with Florida law, but his action would not meet federal requirements.

Nancy-Ann DeParle's financial disclosure documents are murky around her stake in CCMP Capital Partners.  Private equity underwriters require managing directors to have a stake in their affiliates.  Deparle's disclosure forms identify her board slots in CCMP affiliates but showed no equity stake in CareMore Health Plans, Legacy Hospital Partners or Noble Environmental Partners.  CareMore is being acquired by WellPoint. 

Nancy's 2010 filing cites CCP/JPMP Friends, the stake she held in relation to JPMorgan private equity, prior to CCMP's spinoff:  For CCP/JPMP Friends her discolure states:

I made an irrevocable transfer of my interest to James DeParle.

I take it this is the son who sat in her lap as the House of Representatives passed health reform.  As the transfer occurred on 6-1-09, James would benefit from companies who win under the bill passed March 2010.

The attachment showed four distinct investment funds

CCP/JPMP Friends 2001-1
CCP/JPMP Friends 2002-1
CCP/JPMP Friends 2003-1
CCP/JPMP Friends 2004-1

A number of investments are pharmaceutical/healthcare firms, Xenon Pharmaceuticals, WarnerChilcott, National Surgical Care, Psilos/Comprehensive Neuroscience, FlowCardia Inc., Pharmos/Vela Pharmaceuticals and Transmedics.  These Four distinct Friends investments showed as $15,000 to $50,000. That seems a tiny stake for private-equity underwriters (PEU's) to hold in their investments.

Under arrangements DeParle listed:

CCMP:  I retained my 401(k) with CCMP.  Neither CCMP nor I have made any further contributions to the account.

The filing shows one listing for CCMP Capital Advisors LLC 401(k), a Vanguard small cap fund worth $1,001 to $15,000.  A number of mutual funds follow, but are not expressly listed as part of the 401(k).  This seemed odd as "NancyAnn SEP IRA" was listed above all its mutual fund holdings.  Her 2011 filing corrected this, listing a number of mutual funds under her CCMP 401(k).

Her three years of filings show no indication of any equity stake for her years as Managing Director of CCMP.   Nancy's 2009, 2010 and 2011 disclosure forms are silent on the CareMore Health Plans and Legacy Hospital Parnters.  What happened to them?  They should show up in some form.

This concern is punctuated by her 2011 filing which lists:

MQ Interholdings, LLC (share of proceeds of earn-out of 2007 sale of CCMP portfolio company)

Her capital gain from the sale of MedQuest, a medical imaging company, was $6,825.  What other PEU compensation schemes remain unlisted?  How might she participate in CareMore, CCMP's five bagger?

Rick Scott's wife, Nancy-Ann DeParle's son, do they really remove PEU conflicts of interest? Red and Blue love PEU's.

Source:  DeParle's 2010 Financial Disclosure and 2011 Financial Disclosure forms.  American University published her 2009 form.

Update 9-3-11:  DeParle wrote a stinging defense of her Rube Goldberg health care plan.  She failed to identify her residual PEU health care stakes and how greed will save American health care.  Extrinsic motivators kill intrinsic ones.

Update 8-20-14:  President Obama continued his conflicted health reform appointments.  Naked Capitalism found two more. 

Update 2-19-21:  Nancy Ann Deparle had a banner payday after Consonance Capital sold Enclara Healthcare to Humana in 2020.  Enclara is "one of the nation's largest hospice and benefit management providers."  Yet, Humana intends to spin off Kindred Hospice as it prefers a partnership model for end of life care.

Carlyle in Exclusive Talks with PPD

Carlyle Group co-founder David Rubenstein said healthcare was the place to be at the Milken Institute meeting.  According to a report, Carlyle is the finalist for Pharmaceutical Product Development Inc., a contract drug developer.  Bloomberg reported:

The company, which has a market cap of $3.5 billion, provides contract drug development and discovery services for pharmaceutical, biotechnology, medical device, academic and government organizations. It has offices in 44 countries and more than 11,000 employees.

The deal is part of a move by the board of directors and management to review its strategy and capital structure, looking for actions that create value for shareholders.  Bids stood at $4.3 million or more.

It's not clear how much would be equity vs. debt:  PPD has a $2 billion balance sheet with nearly $400 million in goodwill.  This will more than double in a $4.3 billion deal.

How will interest expense and PEU management fees soar, thus not reducing health care costs?

PPPD's tax rate during the Bush years averaged 34%, dropping to 31% during the Obama administration and expected to go lower pre-PEU buyout.

Total gross unrecognized tax benefits were $30.0 million and of this total, $14.5 million is the amount that, if recognized, would reduce our effective tax rate.

PEU's hate paying taxes, so expect this to drop further.

Carlyle loves China and PPD is there, having acquired Excel and BioDuro in China. They like growing governmental business, currently 6-8% of PPD's revenues.

Interestingly, CLO manager Carlyle might buy packaged securities from PPD.

We held approximately $88.6 million and $78.7 million, net of unrealized losses, in auction rate securities at December 31, 2009 and 2010, respectively. Our portfolio of investments in auction rate securities consists principally of interests in government-guaranteed student loans, insured municipal debt obligations and municipal preferred auction rate securities.

Should Carlyle win PPD, rest assured they have multiple ways to ring the register. How long before Carlyle conducts a debt offering for dividends, adding to an exploding health care pie?

Update 10-3-11:  Carlyle paired with Hellman & Friedman to buy PPD.  The deal fell from $4.3 billion to $3.9 billion.  Despite the smaller deal, goodwill will still balloon and health care costs are going up

Carlyle Group to Sell Insight to Time Warner

LA Times reported:

Time Warner Cable has struck a deal to acquire Insight Communications Co. for $3 billion.The agreement, announced Monday, will add close to 700,000 cable subscribers to Time Warner Cable's 12 million customers.  Insight is currently owned by the Carlyle Group, Crestview Partners and MidOcean Partners.

For those curious about Carlyle's Insight history:

1) Carlyle announced their intent to buy Insight in April 2005 with the deal valued at $650 million.  Insight had 1.2 million subscribers at the time.  The deal closed in December 2005. 

2) Despite going private Insight continued filing reports with the SEC until January 2008.  Insight's 10-K revealed a $1.5 million annual management fee paid to Carlyle.

3) Carlyle shed a portion of Insight's business to Comcast in 2007.  The deal involved Comcast taking certain local markets and assuming $1.33 billion in debt. Insight had 1.4 million customers at the time of the split, with roughly half going to Comcast and half remaining.  After the Comcast deal closed, Insight delisted.

4) Carlyle sold a chunk of Insight to Crestview and MidOcean Partners in April 2010.  Carlyle's press release showed Insight with  775,700 customer relationships in the states of Kentucky, Indiana and Ohio.

Carlyle and company tried to sell Insight for $3.5 to $4 billion, but got no takers, given subscribers fell to 750,000.  The LA Times piece noted Insight's 700,000 cable subscribers in the $3 billion deal, while AFP stuck to the 750,000 customer number.


The political links in this deal are interesting.  Carlyle's William Kennard, a former Blue FCC chair and now America's EU Ambassador, signed prior Insight deal documents.  MidOcean Partners boasts Red George Pataki

It's not clear if Insight made any special dividends or distributions to Carlyle, Crestview or MidOcean during their period of ownership.  Did they pull the common PEU move, taking on debt to fund a distribution?  Is that why so many bidders dropped out? 

Nevertheless, parlaying half of a $650 million company into $3 billion is a pretty slick move.  Carlyle's great cash in means fewer affiliates paying management fees.  Will Carlyle model future management fees in their IPO filing?  I'm waiting for the S-1.  Digging is fun.

Carlyle Group's AUM hits $153 Billion

The Carlyle Group broke through the $100 billion barrier in early 2011.  It took six months to breach $150 billion. 

CityBizList Washington reported Carlyle's U.S Equity Opportunity Fund raised $243 million, only four months after their initial filing.  Foreside Fund earned a $362,000 sales commission for pushing Carlyle's U.S. fund.

Carlyle's legal, compliance and tax chief is a principal in the venture.  He's a fellow graduate of the University of Virginia, only he majored in political science and obtained a law degree.  Had he gone through McIntire School of Commerce, it would've been before private equity underwriters became ubiquitous.

Update 8-17-11:  Carlyle's pushing for a premium valuation for its looming IPO.  A filing could come within a month.

Update 8-21-11:  Carlyle's history of profit-maximizing exits can be seen in QinetiQ

Update 8-23-11:  Carlyle pressed the pedal to the floor on marketing to investors, the non-IPO version.  They're going after Aussie and Hong Kong money. 

Odd Hospitality-Healthcare PEU

CityBizList Atlanta reported:

Basketball Hall of Famer Dominique Wilkins​ has joined forces with a high-end health care provider on a new concept in hospitality-health care facilities.

Anuschka Health Care Management Group, LLC specializes in providing health care hospitality equal to the finest hotels. Together, the company and Wilkins have formed Anuschka Health Care Group of Georgia, LLC to develop, manage and own hospitality-health care and rehabilitation facilities that will bear the "Dominique Wilkins" name. The first such facility will be a 20-room private in-patient acute rehabilitation center located in the Roberts Hotel Atlanta-Marietta, 1775 Parkway Place in Marietta, Ga., and will open this Fall.

The story raised many questions in my mind.  The first centered around Georgia's Certificate of Need law and if this project had been approved.  I checked the CON archives for any Anuschka inpatient rehabilitation hospital approvals.  There were none listed.  That said the project may not have been reviewable.

A second question arose regarding the people involved.  Who had the gravitas to land an ex-NBA star, one beloved in the state of Georgia?  Anuschka Healthcare Management Group CEO Juanita Ann Bates showed her credentials as BS, HSA, LNFA, and FACHE. She claimed two other companies on her bio. The first was St. Charles Specialty Rehabilitation Hospital, a 16 bed rehab hospital in Luling, Louisiana. St. Charles most recent Medicare cost report revealed 1,971 patient days.  That equated to a 33% average daily census for a 16 bed hospital. AHD reported St. Charles' finances:

Gross patient revenue -- $2,790,478
Net income -- $503,414

How does a facility one-third utilized make an18% profit?  Almost 70% of their revenue, $1.95 million, came from Medicare patients.  No wonder investors are salivating to get into the ever exploding health care money pie.

Ms. Bates also listed the The Louisiana Wellness Association, established to improve community health and wellness along the lines of the Houston Wellness Association. The Houston group had traction, the Louisiana effort never got out of the starting gate, with no events the last three years and only 2 blog posts, one in 2009 and another in 2010.

Aruschka's "owned and operated hospitals" include the already mentioned St. Charles and Ascension Gonzales Rehabilitation Hospital (AGRH).  AGRH made no mention of Aruschka on its website.     St. Charles website showed Juanita Bates as President/CEO.  It's a mystery as to which facilities are owned and which are operated, I assume under a management contract.  (Click on the image below to make it larger.)

My next area of curiosity regarded private capital behind the deal. One might expect Dominique Wilkens to have funds to invest, as would Michael Roberts of Roberts Hotels, the site of the new 20 bed unit in Marietta.  Roberts Hotels' website showed the Marietta property as a Crowne Plaza.  Clicking on the picture per instruction I got "an invalid Hotel Mnemonic was provided" on Crowne Plaza's website. 

Anuschka listed Gates Group Capital Partners as a strategic partner, specifically giving Gates credit under "global management."  Gates' website stated:

Gates Group Capital Partners provides investment services and diversification opportunities within the areas of transportation, infrastructure and complementary service businesses.

This led to my last area of curiosity, hospital beds inside a hotel?  Life safety codes for inpatient hospitals require expensive new construction.  How much did Anuschka spend on modifications?  Hospital and hospitality might be a complementary service business when people have to travel for healthcare, but this version sounded odd in a major metropolitan area.. 

This could be the most professionally planned project in the history of new rehab hospitals.  If so, the groups involved need to update their websites.  Their look and outdated information don't support their luxury service brand niche.

I wonder how many LLC's are rushing into deals with new private capital?  The Anuschka project will get certified by Medicare at some point.  Will the five star promotion hold in service delivery?   I'd love to read the report.

Four Years Ago, Before PEU's Became Ubiquitous

The NYT reported in summer 2007 on Mitt Romney, as his presidential run ramped up:

Romney excelled as a deal maker, a buyer and seller of companies, a master at the art of persuasion that he demonstrated in the talks that led to the forming of Bain Capital.

“Mitt ran a private equity firm, not a cement company,” said Eric A. Kriss, a former Bain Capital partner. “He was not a businessman in the sense of running a company,” Mr. Kriss said, adding, “He was a great presenter, a great spokesman and a great salesman.”

“In private equity and in consulting, a lot of what you rely on is trust and confidence and persuasion,” said Mr. Kriss.

Bain Capital had $10 billion in assets under management in 2006.  It's $65 billion today. The flashback gets better:

Romney made his money mainly through leveraged buyouts — essentially, mortgaging companies to take them over in the hope of reselling them at big profits in just a few years. It is a bare-knuckle form of investing that is in the spotlight because of the exploding profits of buyout giants like Bain, Blackstone and the Carlyle Group. In Washington, Congress is considering ending a legal quirk that lets fund managers escape much of the income tax on their earnings.

“The amounts of money are so vast that it is truly a matter of time before the taxation of private equity is front and center of the public agenda,” said James E. Post, a Boston University professor who teaches business-government relations. “Increasingly, this world of private equity looks like a world of robber barons, and Romney comes out of that world.”

The legal quirk remains intact for billionaire private equity underwriters (PEU's).  Their preferred carried interest taxation survived four Congressional charges.  Politically connected PEU's from Bain, Blackstone and Carlyle stormed the capital.  They didn't have far to go, given their regular White House visits.

When Mr. Bain proposed starting Bain Capital about two years later (1983), Mr. Romney said, “I loved the idea,” adding that he was cautious at first because “it is my nature to study things extensively before I jump.”

Lawyers advised separating the investing venture from the consulting business to avoid a conflict of interest.

When Mr. Romney finally set up shop just across the hall from Bain consulting in 1984, his initial plan centered on providing venture capital — seed money — for ideas spun off by Bain consultants.

By the time Mr. Romney left the firm in 1999, the investments it had sold off had made enough money to deliver an average annual return that amounted to as much as 100 percent before fees.

Bain's huge profits and fees were taxed at a preferred rate.  But Mitt wanted more.  Here's how slick Romney is to the monied class:

But even among its peers, Bain’s results were so remarkable that by 1998 Mr. Romney had persuaded investors to let the Bain partners keep 30 percent of the profits — an arrangement that is still rare.

Despite the September 2008 financial meltdown, PEU's grew in assets under management and political influence, as attested by their preserving carried interest taxation.  At the time of their 2007 Dunkin' Donuts leveraged buyout:

The Carlyle Group managed $35 billion in assets.  They now manage $153 billion.

Bain had $27 billion under management.  It's currently $65 billion

Thomas H.  Lee Partners' $12 billion under management grew to $22 billion

That's PEU growth of 222% during a financial meltdown.  No wonder people don't want to speak out against them.  Which PEU sponsored candidate will be elected President for 2012?  On the Republican side, ex-Massachusetts Governor Romney faces a fresh PEU face in his Texas counterpart Rick Perry.  A spokesman turned the "Perry vought to run" for President into "Perry vill run." 

Rest assured, Red and Blue love PEU.

Update 8-14-11:  Bloomberg reported:  "Another $100,000 check to Americans for Rick Perry came from Wareing & Co. Ltd., according to FEC filings. The company is listed at the same address as Wareing Athon & Co., a Houston private equity firm run by Peter Wareing, whose holdings include cement company Gulf Coast Pre-Stress Inc."

Special Services: Fran Townsend's Omissions

Frances Townsend is known for her omissions, the most glaring involved no mention of Memorial Medical Center's 35 patient deaths in Hurricane Katrina.  Fran left out the highest hospital death toll in her Katina Lessons Learned report.  Her latest faux pas comes from a SIGA Technologies board bio:

Frances Fragos Townsend has served as a director of SIGA since March 2011. Ms. Townsend is Senior Vice President of Worldwide Government, Legal and Business Affairs at MacAndrews Holdings and has held this position since October 2010. Ms Townsend previously served as Homeland Security Advisor to President George W. Bush from May 2005 until January 2008....  Ms. Townsend also currently is an on-air contributor for CNN as a counterterrorism, national and homeland security expert. She serves as director of DRS Technologies and Thomson Reuters in addition to numerous government advisory and nonprofit boards. Ms. Townsend is the chairperson of the Intelligence and National Security Alliance and a member of the Council on Foreign Relations and the Trilateral Commission. Her extensive experience in government, combined with her legal acumen, is ideally suited for our business.

A look at the Thomson Reuters board showed no sign of Fran.  Further digging found her on the board of Thomson Reuters Special Services.  Special Services has a federal contract through August 26, 2015.  Will Fran's White House e-mails regarding Katrina become public before then? 

Her Thomson Reuters Special Services board bio offered new information:

Townsend is a Director and chairs the compensation committees of 2 private company Boards. 

One might expect a firm specializing in data to identify the two companies.  Then again, I expected the Bush White House to come clean on their Katrina debacles.  Fran supplied a whitewash.  For some reason, few people care. 

Carlyle's Commitments to Mountain Water

Carlye Infrastructure Partners Robert Dove testified on Carlyle's proactive stance in pursuing the Mountain Water acquisition:  Doved cited their public relations push, which included meeting with key stakeholders like Missoula's mayor :

Again we have not waited until we own Park Water before doing so.

The mayor stated Missoula's interest in buying Mountain Water, only he seems resigned to buying a marked up company from Carlyle:

Wednesday's discussion began with an explanation of the PSC's process, followed by Mayor John Engen's discussion of the city's interest in the sale.

It's true the city wants to own the water company, Engen said, but he doesn't believe Park Water would be amenable to a straight sale to the city. But he does believe the city might be able to buy it from Carlyle.

"I believe that based on what Carlyle does, the nature of its business, at some point it will sell the utility. I want the city to be in the position to have a chance to buy it," Engen said.

The mayor may be right, given PEU's proliferation the last decade and their incredible political influence.

Park sold Mountain's Superior, Montana public supply water assets to the town of Superior for $1.22 million in 2000.

Even the mayor pushed the Carlyle line, opposite their PR proactive stance:

Carlyle has maintained it cannot entertain the idea of selling Mountain Water to the city until it is the owner, Engen said.

Here's a suggestion, buy now and avoid the PEU middleman.  Private equity markups are huge.  It's a fact they won't confess.

Update 8-18-11:  Carlyle got testy with the PSC for its probing into the sale, calling the inquiry "unreasonable," a "violation of due process rights" and saying the commission "raises issues well outside its jurisdiction."  Carlyle brings big gun lawyers, billions in ka-ching and unparalleled political influence.  As one Missoulian said "the odds are stacked against us,"

Update 8-21-11:  Missoulian reported "Carlyle contends the PSC is asking for repetitive testimony that "created unnecessary work for Mountain Water and Carlyle."  It would help if Carlyle answered the question the first time it was asked, instead of blowing PEU smoke.

Will IPO Exit Door Slam on Carlyle Group?

Bloomberg reported:

Blackstone Group LP (BX) and KKR & Co. both had their worst one-day declines in more than a year yesterday on concern that a falling stock market will hinder the buyout firms’ ability to sell companies.

Apollo Global Management LLC, which began trading on March 30, suffered its worst day and closed at its lowest price.  

The article focused on affiliates of private equity underwriters (PEU's).

HCA Holdings, the hospital chain partly owned by KKR and Bain Capital LLC, raised $4.4 billion in March in the biggest-ever private equity-backed U.S. IPO, according to Preqin. The company declined 24 percent from its debut through yesterday. 

Bloomberg's concerns could apply to The Carlyle Group's looming IPO.  Will they execute it in time? What will the third and fourth quarters hold for Carlyle, which hoped to file an S-1 and sell $750 million to $1.2 billion in equity by the end of the year.

Experts expect Carlyle to "be valued in line with its biggest competitors, KKR and Blackstone Group LP."  They are on their way down.  Carlyle saw its Blue Wave Partners Hedge Fund implode in eight short months in 2008.  What will the next five months hold?

Update 8-13-11:  Reuters picked up on this theme.  Their article stated "The Carlyle Group, a major competitor to Apollo, is even more sensitive to the closing IPO door since it was hoping to file for its own public offering in the third quarter."

Carlyle's ARINC to Prevent Another LifeCare?

The Carlyle Group's ARINC is helping the U.S. military prepare for the next national emergency.   ARINC's press release stated:

The company recently received another sizable contract, for communications upgrades on four U.S. Navy E-6B Mercury aircraft.

The Navy E-6B Mercury provides airborne command & control, and communications relay capabilities that may be needed in a national emergency.

Ironically, these capabilities could've made a difference in Hurricane Katrina's aftermath, where LifeCare Hospitals, another Carlyle affiliate, lost 25 patients..

The Louisiana Hospital Association took on the task of coordinating evacuations from dead hospitals, while President George W. Bush dilly dallied.  LifeCare's 25 deaths got no mention in Bush's Katrina investigation, botched by Frances Townsend. 

LifeCare continues fighting Katrina lawsuits, aided by the government's inept response and investigatory silence.  ARINC settled a suit brought by the City of St. Louis Park in Minnesota. POGO.org reported:

In December 2007, the city of St. Louis Park, MN terminated a contract with ARINC to build a solar-powered Wi-Fi network because of delays and performance problems. The city filed a breach of contract lawsuit seeking $1.7 million in damages. The suit was settled in November 2008. According to the local media, neither party admitted fault or responsibility, and ARINC agreed to pay $1.05 million and turn over ownership of 8 miles of fiber-optic cable and related equipment.

ARINC's and LifeCare's performance problems came in close proximity to Carlyle ownership.  Katrina struck weeks after Carlyle purchased LifeCare from GTCR Golder Rauner. 

Will improved communication capabilities impact the next disaster response and investigative report?  Time will tell.

Carlyle Flipping Missoula's Mountain Water: Trade Secret

The Billings Gazette reported testimony given to Montana's Public Service Commission on The Carlyle Group's proposed acquisition of Park Water, owner of Missoula's Mountain Water.

The Carlyle Group has said it intends to be a long-term owner of Mountain Water (by purchasing its parent, Park Water Co. of California), information from the firm appears to reveal that Carlyle has plans to sell it in the “not too distant future.”  Wilson did not reveal the number of years that Carlyle planned to hold the investment, because Carlyle considered it a trade secret.

Carlyle’s exit strategy also lists an annual return expected by the firm — an amount also blacked out in Wilson’s testimony, but characterized by Wilson as “a very large annual return.”

Achieving that return could be harmful for Mountain Water customers, Wilson said, because it might mean raising water rates excessively or making large equity payouts.

Carlyle's expected annual return is 30%.  Cofounder David Rubenstein suggested Carlyle would accept a little less for publicly guaranteed infrastructure projects, say 15%.

Did Carlyle cite their common practice of floating debt for dividends, i.e. large equity payouts?  They did it with Booz Allen Hamilton and Dunkin' Donuts.  What about carried interest, PEU's stake of any investment profits in a venture?

Carried interest may create an incentive for the general partner (or similar managing fiduciary) of a Carlyle-sponsored investment vehicle to make riskier or more speculative investments on behalf of such Carlyle-sponsored investment vehicle than would be the case in the absence of this arrangement.

That's quite a confession from Carlyle, known for burying bad consequences.

Carlyle's regulatory submission revealed a $102 million price tag for Park Water.  It states Carlyle expects Park Water to be the platform company in the water space for Carlyle Infrastructure Partners.  The offer letter to Henry H. Wheeler, Jr. contains:

We would also like to explore retaining you as a board member or consultant post acquisition.  This offer is contingent upon your maintaining the contents of this letter and all related documents and the fact we have delivered it to you, in the strictest confidence.

It's followed by a threat that Carlyle could declare the offer null and void.  It gets better:

Carlyle refused to provide to regulators or the Consumer Counsel its detailed analysis and expected financial results from the purchase.

Carlyle described their analysis before making an offer for a potential affiliate:

In considering potential investment opportunities in the corporate private equity setting, a number of analytical methods are utilized in an effort to achieve a thorough and in-depth assessment of the potential investment. Typically, these analyses focus on the (i) reputation of shareholders and management; (ii) company size and sensitivity of cash flow generation; (iii) operational, marketing, legal, tax, labor, environmental and accounting factors; (iv) business sector and competitive risks; (v) industry competition, both domestically and abroad; (vi) portfolio fit; (vii) exit alternatives; and (viii) other key factors highlighted by the investment team.

In light of Carlyle's extensive due diligence, I was surprised by this response regarding pensions:

a. Is the existing pension plan fully funded? If not, why not?

RESPONSE: Carlyle does not have current information responsive to this data request.

b. Who controls the pension plan, how is it invested, and will it be continued at its present funding?

RESPONSE: Carlyle does not have current information responsive to this data request.

Carlyle purchased RAC without taking on the pension obligation.  Their slippery response raises questions which regulators should investigate.  Will the public interest be controlled by public servants or by PEU's?

Update 8-11-11:  Missoula won't be able to buy Mountain Water directly from parent Park.  Apparently, it has to be sold to Carlyle first.  The PEU (with its high return requirements) can then mark up Mountain Water for resale to a public entity.  That's the state of PPP's..  

Tax PEU's Economic Net Income

Private equity underwriters (PEU's) have a language all their own.  Special dividends and distributions are a "liquidity event."  Lower taxes on profits come via "carried interest."  PEU's report "economic net income," which includes unrealized gains and losses.

Blackstone reported second-quarter economic net income was $703 million, up from $205 million a year earlier.  KKR's economic net income fell to $315 million, down 27 percent from $433 million a year earlier.  It came in at 36 cents a share compared to last year's 48 cents.  Contributing to the drop were higher-than-expected management fee refunds and a dip in deal flow activity.

PEU's hate paying taxes, which is why they load up affiliates with debt/interest expenses and annual management fees.  They recoup much of their initial investment via special dividends, frequently adding debt to pay dividends before taking affiliates public.

Congress should pass a bill making PEU's pay corporate taxes on economic net income.  That might get rid of one nonsense measure, intended to puff up PEU economic might.  What will the PECKER Council bring next?  PECKER stands for Private Equity Capital Knowledge Executed Responsibly.  I think it's solely for their behalf, i.e. pleasure.

Update 8-4-11:  Dealbook reported "economic net income is a nonstandard profit measure used by publicly traded private equity firms that excludes some stock-based compensation costs."And the purpose of excluding stock-based compensation costs by publicly traded PEU's?  Opacity.