Thursday, May 31, 2012

Carlyle Group's New Public Face

The Carlyle Group's new website matches its new publicly traded profile.  That means hidden failures, despite promises of transparency.  Scrolling though Carlyle's "S" portfolio listing, a number of bankrupt affiliates, Semgroup and Stallion Oilfield Services, had been omitted.  Searches of the site produced information on both companies.  Arrows point to where they once were.

Also, PEU Report linked to Carlyle's previous website numerous times the last five years.  Many of those links are now broken.  I expect searches of Carlyle's new website could get you the intended page.  I'm not sure how many will go to that trouble.

Monday, May 28, 2012

Carlyle Group Wetlands' Kiss

The Government-Corporate Monstrosity, the updated version of Eisenhower's Military Industrial Complex, punished a Florida wetlands expert for not giving Highlands Ranch Mitigation Bank, a Carlyle Group joint venture, its desired wetlands permit, worth millions of dollars in "wetlands credits."  Tampa Bay Times reported:

Florida's top state wetlands expert has been suspended after she refused to issue a permit on a controversial project — one that she said her boss was willing to bend the rules to approve.

The project: turning a North Florida pine plantation into a business that attempts to make up for wetlands that are wiped out by new roads and development. At stake: millions of dollars in wetland "credits" that can be sold to government and developers.

The problem, according to a May 9 memo from Department of Environmental Protection wetlands expert Connie Bersok, is that the owners want the DEP to give them lots of wetland credits for land that isn't wet.

After being told by Deputy Secretary Jeff Littlejohn to ignore the rules she had followed on other permits, Bersok wrote, "I hereby state my objection to the intended agency action and refusal to recommend this permit for issuance."

Two days later, Bersok was suspended pending an investigation, her personnel file shows. She declined to comment for this article without DEP permission. DEP officials would not allow a reporter to speak with her. A spokeswoman would not discuss her case.

This staffer isn't the first to bear consequences for not giving Highlands Ranch Mitigation Bank their due.

Highlands Ranch Mitigation Bank, has repeatedly tussled with permitting officials. "They're scrappy, these guys," said Glenn Lowe, who lost his job with the St. Johns River Water Management District after he refused to give Highlands Ranch what its owners wanted. Former water district executive director Kirby Green said Lowe and other employees lost their jobs because Gov. Rick Scott's pro-business administration didn't like the way they treated Highlands Ranch.
The process shows the usual GCM features:

1.  The Deputy Secretary revised the method for calculating wetlands credits, using a memo written by Highlands' attorney.

2.  Highlands reapplies for additional wetlands credits

3.  Deputy Secretary asked wetlands expert to ignore the rules.

4.  Wetlands expert declined

5.  Deputy Secretary instructed wetlands expert to create a "performance based pilot."

5.  Wetlands expert cited such a pilot is against state law.

7.  Deputy Secretary suspends wetlands expert, pending investigation
Such PEU moves are necessary for Carlyle and company to profit:

Highlands is "hopeful the permit will be issued soon — this time with the number of credits the owners need to make the bank work financially."

That's the role of government in our PEU world.  The Carlyle Group's David Rubenstein cut his financial teeth on government created credits:

In 1984, a law was passed allowing native corporations in Alaska—that is, Eskimo owned companies created by Congress to manage native lands—to sell their losses to businesses looking for tax write-offs. The Marriott executives, working with David Rubenstein at Shaw Pittman, discovered the Eskimo clause and vigorously bought the losses to offset gains. The adventure has become known in some quarters as the Great Eskimo Tax Scam.
Marriott executives provided seed money to start Carlyle in 1987.  For twenty five years, Carlyle exploited such seams, stitched by politicians of both the Red and Blue variety. As for WaPo, they've become huge Carlyle Groupies.  Allegiances, like politicians, can be bought.

Update 6-10-12:  The Orlando Sentinel ran a story on how Carlyle and company play hardball.  

Sunday, May 27, 2012

The Price of Carlyle's IPO: Founders' Holdings Revealed

Carlyle Group co-founder David Rubenstein is the public face of the private equity underwriter.  Rubenstein had to reveal his holdings once Carlyle went public at $22 per share.  CG rallied Friday to close at $21.51. 

At that price Rubenstein's partnership interest of nearly 47 million units is valued at $1,010,962,342.  Fellow co-founders William (Bill) Conway and Daniel D'Aniello hold a similar interest.

Carlyle's David Rubenstein: Aw Shucks Billionaire

WaPo published a lengthy piece in their Lifestyle section on Carlyle Group co-founder David Rubenstein.  The piece wasn't so much on the lifestyle of a billionaire.  It dealt more with Rubenstein's career path, sort of "How I Became a Private Equity Underwriter..."

It started with The Carlyle Group IPO and how the shy and self effacing Rubenstein avoided the media spotlight.  It didn't mention how Rubenstein had to discount Carlyle's IPO price to $22 or hawk it as a sure first day moneymaker.

The story moved to Rubenstein's upbringing, his education, his work for the Senate and later the Carter White House. It gave his starting Carlyle a Bill Gates garage feel, only Rubenstein worked with experienced businessmen from Marriott and MCI.

Rubenstein recruited the list of political power players, pivotal to Carlyle's growth.  He pretended like the hiring of Frank Carlucci, President George H.W. Bush and James A. Baker, III were errors that Rubenstein rectified.  Hardly.  Rubenstein recruited a new batch with Red and Blue credentials.

The piece glossed over Carlyle's debacle in mortgage based assets, Carlyle Capital Corporation.  Rubenstein's lawsuit defense asserts "unprecedented tumult."  WaPo missed Carlyle's collapsed hedge fund, Blue Waver Partners.  It made no mention of The Carlyle Group's numerous bankruptcies.

Hawaiian Telecom
IMO Carwash
Stallion Oilfield Services
Verari Systems
Oriental Trading

Church Street Management

Also absent, the lawsuit alleging private equity underwriters conspired to fix buyout prices via club bids.  Carlyle and company recently offered $200 million to settle the suit.  Speaking of settlements, Carlyle and its energy JV partner, Riverstone Holdings, paid $70 million combined to the New York Attorney General to get carved out of a PEU "pay to play" investigation regarding public pension funds.

PEU's say their task is noble, as they earn money for pension funds.  They're silent on deals where Carlyle dumps the company pension in the takeover process, as recently happened with RAC and Brintons.

I find it ironic WaPo cited Carlyle's investment in "forests in China."  China Forestry's books were fiction, given an investigation could only confirm 1% of sales.  China Forestry's stock hasn't traded in over a year, yet The Carlyle Group maintains the company has value. China Forestry is but one of many.

There are many David Rubenstein stories.  Most show the penultimate salesman, with seemingly little regret when promises fall short..

Rubenstein grew up from the bookish Baltimore child.  Today, he milks money from just about anything, amply aided by his media/government friends...

Update 6-3-12:  Rubenstein might get his own "WaPo PEU" section, given WaPo's penchant for writing about him.

Saturday, May 26, 2012

PEU $200 Million Settlement Rejected

New York Post reported:

Buyout titans dangled more than $200 million in front of investors in hopes of settling a long-running bid-rigging suit before it goes to trial, The Post has learned.
Former shareholders in companies acquired by the biggest private-equity firms rejected the settlement offer last month, setting the stage for a courtroom showdown, a source said.

“There have been big numbers bandied about,” the source added. “The offer was hundreds of millions.”

A federal judge is expected to rule soon on whether to certify the case as a class action — a move that could significantly raise the stakes and the potential damages, sources said.

The defendants include no less than the biggest-private equity firms, including Apollo Global Management, Bain Capital, Blackstone, Carlyle and KKR.

They made the settlement offer as a consolidated group, the source said.
Shareholders allege that the firms teamed on deals, including the buyouts of Univision, Harrah’s, Toys ‘R’ Us, Sabre and Alltel, so they would not be competing against each other and could keep prices artificially low.
This didn't make the PEU sweetness and sunshine video, nor did placement fee (bribery) settlements paid to the New York Attorney General.. 

Friday, May 25, 2012

Carlyle Group: Synagro Debt Ratings Cut

Reuters reported on Carlyle Group affiliate Synagro Technologies::

 -- The headroom under Synagro Technologies Inc.'s financial covenants has become limited and the company's revolving credit facility matures in less than one year.
 -- The company's profitability has weakened as the alternative fuel mixture credit (AFMC) has expired.
 -- We are lowering our corporate credit rating on Synagro to 'CCC+' from 'B-' and are lowering our issue-level ratings by one notch.
 -- The negative outlook reflects our estimate that covenant cushions may tighten further and that liquidity may become constrained as the absence of AFMC proceeds could overshadow any improvement in operating performance.

The downgrade on Synagro reflects the company's "highly leveraged" financial risk profile and "weak" liquidity, as the headroom under the total leverage covenant has become very thin and availability under the revolving facility has become limited. 

Highly leveraged, weak liquidity, debt refinancing due within a year?  It smells like a PEU.  That's on top of Synagro bribing Detroit City Councilpersons, while under Carlyle ownership.

Greed drove Carlyle to highly lever Carlyle Capital Corporation (CCC).  When CCC violated its debt covenants, Carlyle owners threw in the towel.  This raises questions regarding S&P's assertion that:

In the event of a covenant violation, we believe Synagro's private equity sponsor The Carlyle Group could likely provide relief through an equity contribution.

They might.  Then again, they might not. CCC is more than a debt rating.  It's instructive on how Carlyle can run..

Thursday, May 24, 2012

Dunkin' Debt for PEU Enrichment

NYPost reported:

Dunkin’ Brands may take on more debt to buy back shares from its private-equity backers, including Bain Capital.

“The most likely use of cash would be a share repurchase, not a public float,” Dunkin’ CFO Neil Moses said yesterday said at a Morgan Stanley investor conference. “It might take the form of a share repurchase from our private-equity owners.”

Moses said the buyback would increase the company’s debt to more than five times earnings before interest, taxes, depreciation and amortization, or Ebidta, up from 4.2 times now.

By that calculation, the company would be taking on somewhere in the range of $200 million to $350 million in additional debt.

Dunkin’s PE owners — Bain, Carlyle Group and THL Partners — took the company public less than a year ago. Six of Dunkin’s 10 directors are from the PE firms.

Control the board, control the money flow.  This is how private equity underwriters keep the cash spigot going, even for publicly traded firms.  

Shareholders exist to enrich the PEU boys.  New Carlyle Group unit holders are down 10% in a few short weeks. Carlyle dunked IPO profits at unit holders' expense. 

Monday, May 21, 2012

Carr Trust Response

The Standard Times offered the following comment in response to my series of posts on the Carr Trust:

There have been many comments regarding the Carr Foundation as well as numbers presented. Fortunately, most are misconstrued.

All the numbers came from IRS 990 filings, Texas Tech or Angelo State University documents.

By will, royalties go into corpus of the Foundation.They are not diverted. Someone has to manage the corpus. Currently, that is the LTF at Texas Tech.  Carr funds have never been under ASU management.
My stories were on the shift of investment of Carr funds to Tech's Long Term Investment Fund (LTIF) after ASU joined TTU.  This decision was made by Carr Trustees.  As I don't have access to the Carr wills, I don't know how Carr Trustees are selected.. 

Currently, they are directed by the Board of Regents of the University. Today, that is TexasTech
This practically may be the case, however it is Carr Trustees who make decisions regarding Carr Trust operations.

The transition of the funds began in 2007 and was finalized some 15 months later. Prior to that they had been managed by outside investment managers. During the fiscal year 2008 the average University Endowment lost a bit more than 20% The Carr probably 8-9% 

This reply missed the opportunity to share TTU LTIF's actual investment performance in 2008.  Carr's historical low risk profile is evidence by the loss of only 8-9% in the financial crisis. 

Carr is not in Texpool. That is ASU interim money. 
A 2010 TTU document showed ASU and Carr money in Texpool.  One would need to know that 100% of Carr funds were in LTIF, information not included in the report.

Alternative investments include many investments opportunities. Hedge funds are the largest concentration for the LTF. These are not the funds you read about in the media. At Tech the goal of these monies is to return 6-8 and provide an alternative to riskier investments. They are not allowed to leverage more than 1-1. On average they have provided this safety and return over the past decade.
During the 2008 financial crisis alternative investments melted down.  Many could not be traded. Derivative positions sank whole companies.  The edge that gave investors higher returns became a razor in reverse, engineering massive losses.  What leverage did LTIF allow hedge funds in 2007?

Other alternatives include real estate, oil and gas investments,private equity,etc. Over the past ten years private equity has easily been the best investment.
This "best investment in the last ten years," private equity underwriters (PEU's), I consider a stain on global business.  There are five years of posts on this blog in this regard.

The Carr Foundation pays Texas Tech 20 basis point for investment oversight. Expenses have been far less than prior costs under the Texas State system.

On $96 million in corpus, Carr pays LTIF $192,000 per year.  Additional expenses are built into LTIF's operations.  Hedge funds and private equity expect their 2% annual management fee and 20% of profits generated.

I would be glad to discuss this in more detail so future comments can be more tempered if anyone so desires.- TeddyB
I still believe LTIF and Carr performance during the Financial Crisis would make an interesting business case.  Students could look at the differing risk profiles and how varying investments performed in the meltdown.  They could impute the actual investment fees and percentage for each portfolio.  This was an issue in 1999 when the state wanted Carr to pursue higher returns, which it later did:

It might make a good legal case as well.  How did attorneys shift the Carr Trust to the Texas Tech Board of Regents, when elected officials, themselves lawyers, assured the public nothing would change?

Carlyle Group to Liquefy AMC Entertainment on China

WSJ reported:

A Chinese conglomerate agreed to acquire U.S. movie theater chain AMC Entertainment Holdings in a deal that they said was worth around $2.6 billion, in one of the biggest moves yet by a Chinese company to break into the U.S. industry.

AMC is the second-largest theater chain in the U.S. and Canada, behind Regal Entertainment Group. The theater chain, which can trace its history back to 1920, is currently owned by a group that includes Apollo Global Management, Bain Capital, Carlyle Group, CCMP Capital Advisors and Spectrum Equity Investors.

China's Dalian Wanda Group Corp.plans to invest up to an additional $500 million in AMC, which the U.S. chain can use to update its cinemas' technological innovations and reduce debt.

Private equity underwriters (PEU's) frequently repackage affiliates such that it's difficult to assess profitability.  Bloomberg reported:

Apollo and JPMorgan Chase & Co. (JPM)’s buyout unit agreed to buy AMC in 2004 for about $2 billion including debt. The next year, they agreed to merge the business with Loews Cineplex Entertainment Corp., owned by Bain Capital LLC, Carlyle Group LP (CG), and Spectrum Equity Investors, leaving the combined company owned jointly by the five firms.
PEU's often make their original investment in special dividends and management fees prior to resale. SEC filings show:

A cash dividend of $652.8 million was declared on common stock for fiscal 2008.
Carlyle and Bain executed their familiar debt for dividend move, taking on $400 million in new debt to fund PEU payouts.

AMCE paid another $261.1 million in dividends in late 2010/early 2011.  These funds were used to buy back debt at 80 cents on the dollar.   PEU's expected another $25.8 million pursuant to their Management Agreement when they thought they could take AMC Entertainment public.

AMC paid PEU's $5 million per year in management fees.  That's $40 million for eight years of private equity ownership.

That's nearly $1 billion in dividends and expected cash payoffs to AMC's PEU owners.  I'd bet that's less than their initial up front money, as much as they loaded AMC with debt.

The next time you see a movie in an AMC Entertainment theater, a portion of your ticket money could be headed to China, The Carlyle Group's favorite investment location.  .

Update 5-22-12:  Deal Pipeline suggests AMCE's PEU owners will make a mere $100 million on the deal.   They understated the 2007 dividend by $100 million, so PEU profits could be double their estimate.

Sunday, May 20, 2012

Al Gore-Colin Powell PEU Closes $525 Million Fund

Dealbook reported:

Kleiner Perkins Caufield & Byers, one of the old-line giants of the venture capital industry, has closed its 15th traditional fund at $525 million, the firm announced late on Thursday.

The fund, known as KPCB 15, will have a wide mandate, including investments in consumer and enterprise Internet start-ups, green technology and life sciences companies. It will be led by 10 of Kleiner Perkins’ partners.

The firm intends to focus more on digital enterprise with KPCB 15. 

Which KPCB affiliate will give Al a digital toy to dangle in front of admirers? 

Greentech Al is the Blue influence peddler.  KPCB Strategic Advisor Colin Powell represents the Red team.  How will they profit as insiders with the Government-Corporate Monstrosity (GCM), Eisenhower's MIC on trillions in federal steroids? 

Saturday, May 19, 2012

Texas Tech's PEU Investing of Carr Funds

Texas Tech University's Long Term Investment Fund Policy speaks eight times of private equity underwriters (PEU's).  The policy details how Tech's LTIF mimics PEU's: The university added a Schedule C to clarify matters:

Alternative Investments Policy

Alternative investments provide added diversification and thereby reduce the risk of the portfolio, without sacrificing expected returns. To mitigate risks unique to alternative investments, the principles contained in this document reflect suggested best practices and are intended to serve as the basis for the due diligence process. For simplicity, alternative investments are segmented into two broad categories: private equity funds; and hedge funds.
Alternative assets increase the risk of a portfolio, otherwise what needs mitigation?  Note the focus on expected returns.

However, before the PEU or Hedgie gets their share of investment funds, Texas Tech's LTIF PEU has to shave 0.5% off the top:

The TTU system will assess and retain an investment management fee at the annual rate of up to 0.5% of the average market value of each endowment for those entities utilizing the services of the TTUS Office of Institutional Advancement or the Angelo State University Development Office.
Take Angelo State's Carr Foundation with $96 million in assets, as reported by ASU's website.   The 0.5% TTU management fee equals $480,000.  That's before any PEU or Hedge Fund management fees:  TTU's Asset Class descriptions (pages 16 and 17) conceivably encompass PEU's across all three classes.

a. Equity:
(1) Equity represents residual ownership of public and private companies after obligations to debt holders have been satisfied. Over longer periods of time, the higher risk of equity ownership should result in higher expected returns relative to cash, bonds and other securities with more senior claims in the capital structure.
(2) Investment strategies: U.S. Equity, Developed Market International Equity, Emerging Markets Equity, Private Equity, and Hedge Funds
b. Credit:
(1) Credit and fixed-income instruments are securities issued by governments, government-related entities and public and private companies that generally contain contractual obligations from the issuer to make interest and principal repayments to investors over the duration of the negotiated term agreement.
(2) Investment strategies: Cash, Cash Equivalents, Government Debt, Debt Issued by Government Agencies, Investment Grade Debt, Below Investment Grade Debt, Private Placement Debt, Hedge Funds, and Distressed Debt.

c. Real Assets:
(1) Real assets are investments in tangible/physical assets such as commodities, real estate and other investments that generally display a positive correlation to the rate of inflation, including gold and inflation-linked bonds.
(2) Investment strategies: Commodities, Commodities-related, Private Real Estate, Real Estate Investment Trusts, Infrastructure, Inflation-linked bonds, Gold, Hedge Funds, and Agriculture.

Texas Tech's Long Term Investment Fund clearly wants a piece of PEU action.  Under Private Equity Fund Manager Selection (page 22), the policy states under "Terms:"

Fees generated by the fund (deal fees) should flow through to the limited partners – a minimum of 50% is expected.
TTU wants a cut of PEU deal fees on top of their 0.5% annual management fee.  That's PEU like, as is their categorization of investment types (page 17):

a. Constrained. The long-only purchase of a commingled fund or security (such as a stock, bond, commodity or currency) with the expectation that the asset will rise in value over the holding period. Investments of this type would generally display higher levels of market risk (beta), utilize less leverage and offer more near-term liquidity.

b. Non-Constrained. Non-constrained investment strategies are generally implemented through a hedge fund structure, which allows managers to not only buy securities long, but to also borrow securities and sell them short if the managers believe that the securities are over-valued. In addition, non-constrained investment managers can utilize derivative securities to protect against or profit from market declines and volatility. Non-constrained investment managers may also use tactical strategies, such as allocating capital between traditional asset classes (stocks/bonds/ cash) or allocating capital between regions/countries/industries for profit. Other non-constrained investment strategies will invest in interest rates, currencies, commodities and various market indices to profit from relative value opportunities. Investments of this type would generally display lower levels of market risk (beta), utilize leverage to varying degrees, be less correlated to traditional asset classes, and require investors to lock-up capital for periods ranging from monthly to several years.

c. Private. Private investments represent a broad spectrum of investment activity, with investments in non-public securities, lack of liquidity, unpredictable cash flows, longer investment horizons and wide dispersion of returns being the most common characteristics. Typically, lock-ups can be 5 to 10 years in duration.
Welcome Texas Tech PEU to PEU Report.  I've long said PEU love is a bipartisan affair. Who knew academics would remain asleep as university foundations and endowments roll the PEU dice?  It's been going on since 2005.

Texas Tech's Board of Regents recently revisited its target asset allocation.

No risk, no reward! However, it seems odd to use Student Scholarship money on the PEU craps table.  I wonder how Robert G. and Nona K. Carr would feel about their estate being 99% invested in Texas Tech's Long Term Investment Fund?  Surely, someone in West Texas remembers their investment predilections.

Suggestion:  Click on any of the images to view them larger

Thursday, May 17, 2012

Bain Joins PECKER Council in Defending PEUs

Now that Republican Mitt Romney is the last one standing for the Presidential nomination-Red Team, it's time for PEU reputation repair.  Mitt's Bain & Company finally spoke out.  Bloomberg reported:

Long-quiet Bain’s willingness to step into the fray may mark a shift in the private equity dynamic around this election.

The Private Equity Growth Capital Council (PEGCC), the industry’s chief lobbying group, is releasing a rolling series of videos featuring case studies and describing the mechanics of the buyout business. The council’s members, which span from Blackstone, KKR, Carlyle and TPG to smaller regional firms across the country, are upping their public profiles.

My pet name for the PEU lobbying group is PECKER.
PECKERS unite behind Mitt, while other PECKERS host Obama fundraisers.  It's a Red and Blue PEU world.

Senators Slam PEU Dentistry

BusinessWeek caught up to the story I found months ago about Carlyle Group affiliate Church Street Management LLC:

Church Street may be abusing patients, “grossly overcharging the United States government in Medicaid reimbursement claims,” and focusing “more on achieving self- imposed quotas via assembly line service than proper patient care,” U.S. Senators Charles Grassley and Max Baucus told the company in a November letter copied to Carlyle co-founder William E. Conway Jr. 

I laughed as Senators Max Baucus and Chuck Grassley believe private equity is the solution to America's healthcare ills.  If you like what they did in dentistry, wait for PEU hospitals and health care.  They're here and spreading like tooth decay.

Wednesday, May 16, 2012

Carlyle's 11 New Funds

After citing The Carlyle Group's "forgettable" first quarter results, FinAlternatives reported:

The Carlyle Group plans to raise 11 new funds this year to capitalize on an increase in deal-making activity, what co-CEO William Conway called "a fantastic time to make investments."

Among the fundraisings planned is $10 billion for its flagship North America fund and its fourth Asian fund.
 WSJ added:

Conway went on to say in a conference call with investors and analysts that “it is precisely at times like this, when economic data and markets are sending confusing signals, that the best investments can be made.”
I.e., when banks won't lend, PEU's prey.  The Carlyle's of the world use the front and back door to obtain victims. 

Conway expects the fundraising environment to improve.  I hope he's more prophetic than fellow co-founder David Rubenstein, who predicted Carlyle's public units would rise post IPO. 

Tuesday, May 15, 2012

Different Carlyle Co-founder Says UnitHolders Will Benefit

Bloomberg reported:

Carlyle Group LP, the private-equity firm that went public this month, said first-quarter profit fell 26 percent as performance fees declined from a year earlier. (CG), the private-equity firm that went public this month, said first-quarter profit fell 26 percent as performance fees declined from a year earlier.

Economic net income, a measure of profit excluding some costs, declined to $392 million from $533 million a year ago, Washington-based Carlyle said in a statement today. Performance fees fell 27 percent to $631.5 million from a year earlier, when Carlyle sold $1.8 billion of shares of China Pacific Insurance Group Co.

“Our central mission remains the same as it has for 25 years -- investing wisely and creating value for our limited partners,” William E. Conway, the firm’s co-chief executive officer, said in the statement. “In doing so, our new partners -- our public unitholders -- will benefit.”
It's the rising tide will lift all PEU investors line.  The problem arises from unit holders being heavily anchored, given their inability to participate in nearly $1 billion in cash tax savings.  Unit holders paid a $1 premium to Carlyle's after hours stock price. 

So far, it's a negative benefit, the exact opposite promised by Carlyle co-founder David Rubenstein. Now fellow co-founder William Conway sounds the refrain.  Do public unitholders need to buy in at ever deepening discount prices to benefit?   

Monday, May 14, 2012

Carlyle Group Hits Dollar Discount to IPO Price

Every picture tells a story.  The Carlyle Group's IPO priced at $22 per common unit.  It's nearly a dollar down as of Monday's close.

Carlyle's earnings are out tomorrow.  Stay tuned....

Sunday, May 13, 2012

Wall Street Casino's CDX NA IG Series 9

CDX NA IG Series 9 originated in September 2007.  Most corporate debt is five year, which means maturity in 2012.  Thus, JP Morgan's synthetic credit trading may contain a short term element.. 

Any investor wishing to hedge their investment can do so with credit default swap specific to the corporate instrument they hold.  They don't need to buy a basket of derivatives covering 121 North American companies.  That makes the "investment" like a bet/wager on the North American economy.

FTAlphaville reported four companies in IDX face credit challenges, Radian, MBIA, Sprint Nextel, and R.R. Donnelley & Sons.  Markit reported companies outside CDX IG 9 that sustained a credit event include AMR, Dynery and Eastman Kodak. 

I have four questions.  One, which companies outside the four cited by FTAlphaville face credit difficulty & possibly default?

Two, who, outside hedge fund traders, wants to buy CDX NA IG 9?  Three, how might JP Morgan push their losses on clients?

Four, how might jilted hedge fund traders gang up on JP Morgan?  Credit default swaps played a role in Lehman's fall.  Lehman's peers were merciless in demanding capital relative to derivative obligations.. 

The Wall Street casino remains alive and unwell.  

Saturday, May 12, 2012

JP Morgan's CDX IG Series 9

According to Dealbook JP Morgan sold synthetic credit coverage on "an index of big American corporations like General Mills, Alcoa and McDonald’s — known as CDX IG Series 9. If the companies in the index went bankrupt, JPMorgan would have to pay out, but if the companies continued to do well JPMorgan could rake in the fees from financial firms that bought the insurance."

Of the 125 companies in CDX IG Series 9, four already had their credit event:

CIT Group
Federal Home Loan Mortgage Corporation
Federal National Mortgage Corporation
Washington Mutual
That leaves 121 companies to effectively insure.  The big money is owed when a credit event or bankruptcy occurs, but positions are written up or down based on the value of the underlying instrument.  Capital exchanges can occur between the parties based on the underlying value. 

Markit shows a number of recent credit events, American Airlines (AMR), Dynergy, PMI Group and Eastman Kodak.  None of these companies are in CDX IG Series 9.

FTAlphaville identified companies in the synthetic portfolio with deteriorating credit:

There are four credits in the Markit CDX.NA.IG.9 that are especially wide: Radian, MBIA, Sprint Nextel, and R.R. Donnelley & Sons. If one is outright long or short, the idiosyncratic risk around these names would have to be actively (expensively) managed.
FT Alphaville's piece shows how JP Morgan sought to be the financial Goliath in the CDX IG Series 9 trade.  It took miffed hedge fund traders and journalists to fell JP Morgan.  Because of their actions, JP Morgan created a non-market for a financial product.  Who is watching, how long will it last and will it spread?

Friday, May 11, 2012

Carlyle Group IPO & Structured Credit

The Carlyle Group never popped upwards in price post IPO, despite assurances from Carlyle co-founder that investors would be rewarded.  The post IPO penalty is fairly small thus far.  However, first quarter earnings are due next week and Carlyle's peers earnings revealed a rough PEU road.

Also, The Carlyle Group is a huge structured credit manager.  JP Morgan had such instruments blow up their first quarter, to the tune of $2 billion in trading losses on synthetic credit products, i.e. packaged bundles of derivatives.  JP Morgan's Jamie Dimon blamed the loss on "egregious" trading.

“There are many errors, sloppiness and bad judgment,” he said, as JPMorgan’s stock sank in after-hours trading. “These were egregious mistakes. They were self-inflicted.” He called himself and his colleagues “stupid.”  

In contrast The Carlyle Group sublty showcased Mitch Petrick, the 50-year-old head of Carlyle’s hedge-fund and structured-credit group, in their IPO sales efforts. Did Mitch avoid JP Morgan like errors?

"The portfolio has proven to be riskier, more volatile and less effective as an economic hedge than we thought.”--Jamie Dimon, JP Morgan CEO

Bloomberg highlighted Petrick, but failed to identify their sources

The people who spoke about Petrick’s career and personality asked not to be identified because they didn’t have his approval to speak publicly. 

This has the feel of regular insider political releases, the kind that say a senior White House staffer.  Carlyle knows that game, inside and out.

Update 5-12-12:  If reports are true, JP Morgan's structured credit problems came from being a mile deep in one hole.  It's unclear if this has any bearing on other.structured credit providers/holders.  Carlyle's first investor call on May 15 may shed light on the matter.

Thursday, May 10, 2012

8 Miles Picks Egregious J.P Morgan for PEU Service

Private equity underwriter (PEU) Bob Geldof's 8 Miles selected J.P. Morgan's Worldwide Security Services to administer the African focused PE fund.  J.P. Morgan's press release stated:

J. P. Morgan's Worldwide Securities Services business has been appointed to provide private equity fund administration services to 8 Miles Fund I, a Pan-African private equity fund that plans to invest in businesses across a broad range of industries, with the aim of driving long-term growth in Africa.  8 Miles, which recently closed its first fund raising, plans to focus on growth sectors in Africa including agribusiness, consumer and retail, health, telecommunications, banking and financial services.

J.P. Morgan will provide a set of comprehensive services including fund and partnership accounting, capital call/distribution management, investor reporting, and investor tracking, investor relations support and treasury services.

The fund, which was an initiative of Bob Geldof, the musician and philanthropist, aims to become one of the largest private equity investors in Africa. Investors in the fund include the African Development Bank; CDC, which is the UK government-owned development-finance institution; and the International Finance Corporation, the World Bank's private sector arm. 

The news came ten days before J.P. Morgan's investment arm blew up from a $2 billion loss, caused by "egregious" mistakes (Jamie Dimon's words).

8 Miles contracted with a division of J.P. Morgan marketed as:

A premier securities servicing provider that helps institutional investors, alternative asset managers, broker dealers and equity issuers optimize efficiency, mitigate risk and enhance revenue.. 
Geldof's 8 Miles needs to stay away from synthetic credit instruments at a minimum.

J.P. Morgan estimates the business unit with the portfolio will post a loss of $800 million in the second quarter, excluding private equity results and litigation expenses
The above implies private equity is part of the egregiously operated business unit. Here's further confirmation:

(It's the) arm of the bank that JPMorgan has said is used to make broad bets to hedge its portfolios of individual holdings, such as loans to speculative-grade companies.
Speculative grade financing equals PEU's.  Bob Geldof may wish to look behind Jamie Dimon's cold eyes, given J.P. Morgan's current lack of sunshine.

Update 5-11-12:  A former Wall Street reporter commented, "Glad to see that the casino mentality is alive and well in the risk management department! I mean how much more embarrassing does it get? But, I'm sure no one is humbled."  Spot on!  It's a matter of time before some financial titan analogizes it to sex.  Are you feeling lucky today?

Wednesday, May 9, 2012

Carlyle China Faces Restrictions

China Daily reported:

The National Development and Reform Commission decided last month that all of the capital in a yuan-denominated fund must come from local Chinese investors, or the fund will be classified as foreign and cannot invest in sensitive industries, such as national defense-related companies, and they also face restrictions on investing in industries including resources, telecommunications, education and the Internet.
One senior private equity underwriter (PEU) stated:

"It is rational that yuan-denominated funds managed by a foreign PE company should not be allowed to invest in sensitive industries in China, but such funds should be regarded as domestic, or there is no reason for a foreign company to raise yuan funds." 
The story closed with:

A spokesman for Carlyle China said the firm is studying the NDRC statement, and declined to comment. 
China is heavily invested in global energy resources, including a large shale oil and gas field in South Texas.  If PEU's can't invest strategically in China, they can look elsewhere.  The government gives and takes away, frequently for the benefit of PEU's.

Carlyle Group Breaks Flatline

The Carlyle Group's units broke below their IPO price of $22 per share.  The WSJ reported on the matter by citing an earlier story:

People familiar with the matter said the lead bank on the deal, J.P. Morgan Chase & Co., helped keep the shares in the black.
WSJ went on to say:

J.P. Morgan must have been earning their keep. The stock barely budged during its first four days as a publicly traded company.
Carlyle co-founder David Rubenstein promised a pop, although he suggested it would be positive for investors.  CG fell on low volume.  Oddly, deeper discounts didn't bring more buyers. 

Tuesday, May 8, 2012

Carlyle Group: Range Bound or Flat Line?

Carlyle Group co-founder David Rubenstein said they priced the IPO so investors got take advantage of the pop.  So far, no pop.  The chart looks tails off into a near flat line.

One day trading was range bound, mostly a penny up or penny down..

The pop could come, up or down.  Stay tuned.

Saturday, May 5, 2012

Carlyle's "Cash Tax Savings" Won't Go to Unit Holders

I admit it.  I missed the major thrust of The Carlyle Group's byzantine "cash tax savings" in their "tax receivable agreement.".  I mistakenly thought Carlyle's co-founders were being indemnified against any future tax increases on carried interest. Instead, it's a co-founder cash bleeding of affiliates

We will enter into a tax receivable agreement with our existing owners whereby the corporate taxpayers (affiliates) will agree to pay to our existing owners (partners) 85% of the amount of cash tax savings, if any, in U.S. federal, state and local income tax that they realize as a result of these increases in tax basis. 

This bizarre siphoning of cash from affiliates is based on the pass through of corporate overhead from Carlyle.  Pre-IPO Carlyle's owners estimated this cash sluice to be over $1 billion.  Removing the jargon from Carlyle's final S-1/A we get:

Based upon certain assumptions, we estimate that the corporate taxpayers aggregate amount (owed) would be approximately $1,035.6 million.
Post $22 per share IPO, Carlyle's latest filing has this down over $120 million::

Based upon certain assumptions, we estimate that the corporate taxpayers  aggregate amount (owed) would be approximately $915.2 million.

Driving home the cash drain intent is Carlyle's description of its Tax Receivable Agreement:

Payments under the tax receivable agreement will be based on the tax reporting positions that we will determine. The corporate taxpayers will not be reimbursed for any payments previously made under the tax receivable agreement if a tax basis increase is successfully challenged by the IRS. 

As a result, in certain circumstances, payments could be made under the tax receivable agreement in excess of the corporate taxpayers’ cash tax savings.

In the event that The Carlyle Group L.P. or any of its wholly-owned subsidiaries become taxable as a corporation for U.S. federal income tax purposes, these entities will also be obligated to make payments under the tax receivable agreement on the same basis and to the same extent as the corporate taxpayers.

It remains to be seen how that odd "qui pro quo" at the end materializes.  The end result is a cash bypass of new Carlyle stock holders.  These payments are made to exiting owners, not unit holders.

How many new Carlyle investors are aware of this?  I envision them standing and staring at their unit.

Update 5-7-12:  Forbes speaks of the potential conflict between PEU partners and unit/stock holders.

Update 8-3-15:  Naked Capitalism noted this PEU trick to strip cash from affiliates going public.

Update 8-4-22:  A pension fund sued Carlyle Group Inc.'s senior leaders in Delaware, challenging a $344 million payment to the private equity firm’s founders in connection with the end of tax agreements they reached when taking the asset manager public.

Friday, May 4, 2012

DBD's "Good News" on Carlyle IPO

Forbes revealed The Carlyle Group's latest redefinition of success on their IPO:

The deliberate discount, together with no first day pop, means that Carlyle’s billionaire founders, David Rubenstein, Daniel D’Aniello and William Conway, hold stakes in the company worth $1.03 billion each. And while, with their personal cash reserves, including last year’s distribution of $134 million apiece, the trio are still comfortably billionaires boasting net worths in the $1.8 billion range, they themselves have been heavily discounted from the $2.8 billion each was tagged with just a few months ago.

The $1 billion drop for each DBD is significant and fails to meet any success criteria.

But that being said, the fact that Carlyle enjoyed a relatively quiet IPO is a good thing. It means the firm’s shares haven’t tanked yet and Rubenstein, Conway and D’Aniello have successfully avoided the pervasive negativity that would have accompanied an immediate flop. So while they are by no means out of the woods yet, it is so far so good for the newly public Carlyle Group and the three billionaires behind the $147 billion private equity behemoth.

Didn't David Rubenstein promise a pop or was that sales talk, i.e. puffery?  A nickel a unit doesn't sound like a pop to me.

Thursday, May 3, 2012

Carlyle Group IPO: Redefining Success

The IPO launched at $22 per unit, well below maximum pricing of $25. Carlyle's units closed at $22.05 in its first day on NASDAQ.

This "performance" required redefinition for success.  Reuters reported:

But it wasn't enough for Carlyle co-founder David Rubenstein to save face. He had told investors during the company's road show that by valuing the firm conservatively, he hoped Carlyle's stock would rise after the firm went public, unlike the selloffs that followed the recent IPOs of its peers.

"Our principal focus in the offering was to attract a large number of highly respected institutional investors who support our emphasis on cash earnings and who will support our efforts to grow the firm over the long term. We think we have accomplished that objective," Rubenstein said in a statement after the market close on Thursday.

Not long ago Carlyle expected $850 million in IPO proceeds.  How many times did Carlyle redefine success downward? Good thing WaPo rode to the rescue with a positive statistic, new D.C. millionaires.

Wednesday, May 2, 2012

Carlyle Prices at $22: Below Original Range

Forbes reported:

The company (The Carlyle Group) priced its IPO at $22 per share after the closing bell, according to, the low end of a $22-$23 anticipated range that had already been lowered from $23-$25. The 30.5 million common units sold raised $671 million.
Not long ago estimates were that 10% of Carlyle would fetch $850 million.  

Shares of Carlyle will begin trading Thursday on the Nasdaq stock exchange.
The DBD's, Carlyle's co-founders who plan to liquefy their stake, hope Carlyle doesn't pull an Oaktree and fall out of the IPO gate.

It took 21 investment banks to push Carlyle at $22.  Unimpressive.

Tuesday, May 1, 2012

Seas for Pricing Carlyle Group's IPO

How much will The Carlyle Group discount its IPO, given this week's bad news?  Will the IPO leave dry dock as a majestic vessel in smooth seas?

Or will things be a bit rougher?
Only 21 Investment Banks will know for sure....

Update 5-2-12:  The launch was rough coming in below the expected range.