KKR Lands General PEUtraeus

General David Petraeus became a private equity underwriter (PEU) with KKR. WaPo reported PEUtraeus will head up the firm's division concerned with "macroeconomic and geopolitical forces that could influence KKR’s investment decisions.  Those forces are the Government-Corporate Monstrosity, General Dwight D. Eisenhower's Military-Industrial Complex on trillions in federal steroids.  PEUtraeus serves what Eisenhower grew to disdain. 

From book deal to DealBook, how PEUtraeus' fortunes turned.  Might it be time to reintroduce the General at the Bilderberg 2013 meeting, a regular event for a number of KKR leaders?

WaPo Pushes Carlyle's ValueCast

WaPo published an excerpt from The Carlyle Group's recent ValueCast by co-founder David Rubenstein (Carter White House) and Chris Ullman (Clinton White House),   Rubenstein is a PEU Oracle (PEU is my acronym for private equity underwriter).

The ValueCast included a confession on how PEU's make money:

...very little equity was put in, and complicated financial structures were used to enhance the returns.

Leverage and easy credit have returned to levels prior to the financial crisis.   Liquidity recapitalizations, affiliate debt-for-dividend financial restructuring, exploded after the financial crisis.  China Daily had this to say on PEU's love Chinese companies 

Taking a company private, he added, is normally a complex business, but the "distance, differences in accounting rules, and unusual corporate structures" involved in privatizing a Chinese company are "likely to lead to bigger disputes over what a company is actually worth".

In the Washington, D.C. world of power and influence, how might WaPo help Carlyle fund raise, given their spreading Rubenstein's "Top Ten" list of PEU changes?

Carlyle's Latest Cash In

The Carlyle Group did not separate itself from its private equity underwriter (PEU) peers based on financial results for the first quarter of 2013.  Blackstone and Apollo Global Management's results showed large gains vs. a year ago.

PEU's big paydays come from monetizing affiliates.  In Q1 Carlyle realized 45 private equity deals for nearly $3 billion, an average of $66.4 million per deal.  That seems rather paltry for a firm expecting to make 30% annual returns on investment.

PEU's profit by selling their stake in publicly traded affiliates or private sale to another buyer, often a fellow PEU.   Q2 could have Carlyle flipping more affiliates.  Carlyle is currently shopping Coates Hire, an Australian firm which specializes in equipment rental.  Carlyle paid $1.5 billion for Coates and expects over $3 billion from its sale

Carlyle will sell 15 million shares of Wesco Aircraft for proceeds of $240 million.  It sold 7.5 million shares of affiliate SS&C at a price of $32.20 per share and its remaining 20.3 million Hertz shares for $23.62 apiece.  In addition Carlyle backed Chinese firm GDC filed for a $75 million IPO on NASDAQ.

Wesco - $240 million
SS&C - $241 million
Hertz - $480 million
GDC - $75 million

That's over $1 billion in stock sale proceeds.  Also, Carlyle plans to take General Lighting public in Saudi Arabia. 

Q2 also saw Carlyle's co-founders set up their personal cash-in of Carlyle Group stock, even as work to remake the world in their PEU image.

Update 5-29-13:  Add a 3.9 million share sale of Boston Private Financial Holdings stock by Carlyle affiliate BP Holdco and another $40 million goes into the Carlyle kitty.

Carlyle Group: Financial Engineers

MarketWatch reported:

Co-Chief Executive Officer David M. Rubenstein discussed the top ten changes to the private equity industry following the Great Recession. 

In ValuCast, Mr. Rubenstein discussed trends and developments in the industry, including: 

-- Increased regulatory and public scrutiny

-- Emergence of the individual investor

-- Changes in fundraising dynamics

-- Institutional investors seeking a greater variety of products and strategies

-- Traditional private equity firms becoming alternative asset managers

-- Increased focus on operational improvement versus financial engineering 

Rubenstein bragged on private equity underwriter (PEU) use of financial engineering, but blamed other factors, like unprecedented tumult, when things went awry?   

CNN Money came to Rubenstein's rescue two years ago on this topic:

"Financial engineering" is not some phony phrase created to make private equity look bad. It's used to describe the ways PE firms turn profit outside of the differential between purchase and sale price (using lots of leverage, dividend recaps, deal fees, etc.

The Great Recession created a period with a negative differential between purchase and sales price.   That caused more dividend recapitalizations, referred to as liquidity recaps by Carlyle's Rubenstein. 

Rubenstein sells PEU, 24 hours a day. 

Duke University's PEU Board Chair

The Duke Chronicle reported:

The Board of Trustees elected David Rubenstein, Trinity ’70, as Board chair in its meeting this weekend. Rubenstein, co-founder and co-CEO of private equity firm The Carlyle Group, is well known for his philanthropic support of the University, having donated over $50 million to the University. His most recent contribution to Duke was a $10 million donation to the Sanford School of Public Policy, announced Apr. 30. He has been on the board for eight years, and has spent the last two years serving as co-vice chair with Jack Bovender, Trinity ’67 and Graduate School ’69.

David Rubenstein earned billions as a private equity underwriter, which he's ready to give away as a member of the Bill Gates Giveaway Club.  Private equity underwriters buy and flip companies.  Rubenstein brags of Carlyle's 30% annual returns and has been know to show displeasure at removing PEU's preferred tax status.

PEU ties to Duke's board include Rubenstein's former Co-Vice Chair Jack Bovender.  Bovender's HCA sold out to KKR, increasing health care costs by billions in interest expenses.  In addition KKR bled over $4 billion in cash from HCA prior to taking the company public.  Bovender sits on the board of Bank of America.

PEU's became ubiquitous in the last decade, which might be foundational to Rubenstein's comment about Duke's board:

“The Board is not divided as some university boards that have big splits,” he said. “This Board works very collegially. It’s a pleasure to sit through the board meetings.”

Duke's board isn't divided, like the University of Virginia, a fellow ACC institution.  Ironically UVA's board split along private equity lines.

Duke has an administrator-faculty split, which expressed in the Board meeting over online education.

Provost Peter Lange discussed online education with the Board in the aftermath of the Arts and Sciences Council voting down for-credit online courses.

The Arts and Sciences Council vote broke a pre-existing contract with internet education company 2U, which entered the University as a partner in the company’s Semester Online consortium of schools.  Prior to the vote, neither the decision to pursue online courses for credit nor the decision to sign with 2U was voted on by any faculty body or committee. 

Lange said the discussion with the Board was brief. They discussed why the issue was voted down and how administrators will follow-up on the matter in the Fall. 

He said the outcome of the faculty vote was in large part a result of timing. “The intense opposition came up very late and we had to get a vote by the end of the semester if we were going to start in the Fall, so things got kind of squeezed,” Lange said. “As a result we weren’t really able to talk through all the issues with people who were so intensely opposed and the vote went against us. It was really low key.” 

He added that administrators still plan on moving forward with Semester Online, but did not specify in what capacity.

2U is a PEU affiliate of Highland Capital, Bessemer Venture Partners, Redpoint. Ventures Semester Online is a joint venture between 2U and top tier universities.  2U is really 2tor, which was formed in 2008.  SEC documents indicate 2tor raised $26 million in capital in March 2012, their fifth capital raise.

2U's CEO and co-founder Chip Paucek graduated from George Washington University with a degree in political communication.  He started Cerebellum Corporation, which focused on educational videos and online resources for elementary, middle, high school and college educators and students.  He also worked for two other venture companies and a political campaign over his professional career.

Chip's bio at former employer Educate, an Apollo sponsored entity, stated:

Christopher (Chip) J. Paucek became the President of Educate Products in November 2005. From January 2005 to November 2005 he was General Manager of Hooked on Phonics and from July 2004 to January 2005 he was Vice President of Corporate Business Development for Educate, Inc. From January 2004 to November 2004, he was Deputy Campaign Manager of U.S. Senator Barbara Mikulski’s 2004 re-election campaign. In December 1993, he founded Cerebellum Corporation and served as Co-Chief Executive Officer from that month until January 2004. Cerebellum Corporation sold products under the Cerebellum and Standard Deviants brands and produced, among other things, the PBS television series Standard Deviants.

Educate management led a buyout of the company with backing from Sterling Capital.  Analysis of the deal highlighted numerous problems relative to Educate products, including poor mix and sell through.   

Private equity's goal is to flip companies for big profits.  How will Duke help 2U's CEO and PEU owners cash in big?  How will Board Chair & PEU David Rubenstein factor into the equation?

Carlyle Group's Synagro Bankruptcy Tale

The Taft Midway-Driller reported:

Synagro Technologies, the company that operates the organic composting facility on South Lake Road near Taft, filed for bankruptcy last month to seek a court-approved restructuring of its mounting debt. In addition, a $10,000 check, Synagro's annual sponsorship for the Taft Chamber of Commerce, bounced, the Taft Midway Driller learned. 

A Synagro spokesperson, who asked not to be identified, told the Taft Midway Driller that Synagro intended to make good on the payment and said the bankruptcy filing was merely for reorganization.

A bankruptcy is to handle claims by creditors, which includes debt holders and suppliers.  The Taft Chamber of Commerce's claim should be in the bin with the rest. 

Synagro once looked like black gold to The Carlyle Group, a huge private equity underwriter (PEU).  Synagro's sewage sludge contract with the City of Detroit looked like a done deal, then it didn't.  With pressure from Carlyle and Synagro executives two salesmen tried to fertilize the deal with bribes.  The Detroit Free Press reported:

In October 2007, seven weeks before the Detroit City Council was to vote on the sludge-hauling contract, Rosendall was feeling heat from Synagro headquarters.

In a phone conversation with an aide to Kwame Kilpatrick, Rosendall complained of getting his butt kicked by his bosses in Houston. Executives, he said, were feeling pressure because they had promised the Carlyle Group that the Detroit deal was in the bag.

Detroit was to be Synagro's largest municipal sludge-disposal contract, bigger even than New York City. The company expected profits of up to $5 million a year for 25 years from annual revenues of $47 million.

Carlyle, one of the world's largest private investment firms, bought Synagro months earlier, largely because of the potential in Detroit.

Yet, prosecutors didn't pursue charges against Synagro or its PEU owners:

"It's hard to explain why charges weren't filed against the company, given the turning of a blind eye by senior executives," said Wayne State University law professor Peter Henning, an ex-federal prosecutor and white-collar crime expert. "There are any number of cases in which companies have been charged for this kind of conduct, when you have the involvement of more senior employees."

Approval of bribes is hardly turning a blind eye.

"Synagro is a party to this conspiracy ... and yet, for some reason, they are not here."

Legal experts say corporate executives can be charged if they had knowledge of their employees' illegal conduct -- or deliberately ignored it.

Jennifer Arlen, an expert in corporate criminal liability and a law professor at New York University, said the Justice Department has been less receptive to charging a corporation itself because that can hurt innocent shareholders.

Innocent equity owners, like The Carlyle Group? 

Carlyle was unhappy with the demise of the Detroit contract, and up to $5 million a year in lost profits.

That's why Synagro entered bankruptcy and is merely "reorganizing."  It's another Carlyle PEU Tale. 

Barron's Doesn't Recognize Political Influence

Barron's reported on a spate of hedge funds trying to make a fortune on Fannie Mae and Freddie Mac. 

A number of profit-minded investors that have taken positions in the preferred shares of the formerly distressed mortgage companies are pushing an alternative. The politicians, they claim, are blowing an opportunity both to generate at least $100 billion in deficit reduction from a spinoff to the public and to significantly limit the government's footprint in the mortgage market. Recall that in last month's budget, President Barack Obama took a huge political risk in calling for the sale of the government-owned Tennessee Valley Authority for about $25 billion to help reduce the deficit. 

The financial acumen of these investors—which include hedge funds Paulson & Co.; Claren Road Asset Management, owned by the Carlyle Group; and Perry Capital—stands in stark contrast to their seeming naiveté about Washington. No matter how sensible on paper, their investment is unlikely to succeed. As one of my D.C. sources quipped, "Congress can't fix the Post Office, let alone Fannie and Freddie." 

The Carlyle Group is naive about Washington, D.C.?  Given Carlyle chose D.C. in order to profit from federal business and influence legislation/policy, Barron's writer appears the naive one. 

A look at prior Fannie Mae and Freddie Mac board members and executives reveals a who's who of Washington, D. C. navigators.  It would be the final insult to taxpayers, after rescuing Fannie and Freddie, to have the Carlyle Group make another ten bagger. 

Milken Global Conference Weaves PEU Thread

Carlyle Group co-founder David Rubenstein moderated a panel at the Milken Institute's Global Conference which included Robert Rubin and Gary Becker..



This video is worth the watch.  Rubenstein and Rubin represent private interests whose power eclipses that of nation states.  Both are private equity underwriters (PEU's), Rubenstein is a Carlyle Group co-founder, while Rubin advises Centerview Parnters.  Rubin also worked for Goldman Sachs and Citi.

PEU Al Gore cited special interests in his Milken talk.  Al focused on politicians turned lobbyists as the toxic element to governance.  He omitted PEU's.  Al advises Kleiner, Perkins, Caulfield & Byers and co-founded Generation Investment Management.  Al also sits on Apple's Board of Directors and owns millions in stock.  Gore personally symbolizes the special interest he abhors.



The Rubenstein's of the world lobby to retain PEU preferred taxation via carried interest and lower tax rates.  That would benefit the Gore's, as well.  Red and Blue love PEU.

Update:  ZeroHedge posted a piece about risk taking which stated, "We have ended up with a system where the worst of the risk takers have the ability to take the most risk and are currently taking it at extreme levels."  Risk, reward and eventually risk, implosion.  Will the Fed and feds yet again backstop the kajillionaires?  

TPG Bests Carlyle Group in 5 Year Fundraising

David Bonderman's TPG was the top private equity fundraiser for the last five year period, raising nearly $36 billion.  The Carlyle Group, with its DBD co-founders, came in second

1    - TPG
2    - Carlyle Group
3    - Blackstone Group
4    - Kohlberg Kravis Roberts    
5    - Warburg Pincus    
6    - Goldman Sachs Principal Investment Area    
7    - Advent International    Boston
8    - Apollo Global Management    
10    - CVC Capital Partners
Source: Private Equity International, 2013 

The private equity underwriter (PEU) segment has been in a four year decline.

Aggregate capital raised over previous five year period by PEI 50:
2009    - $813 billion
2010    - $771 billion
2011    - $733 billion
2012    - $704 billion
2013    - $586 billion
Source: Private Equity International, 2013

The decline is due to the monster funds passing through the PEU snake's belly:

It’s important to note that this is the first year that the PEI 300 totals do not include many of the pre-crisis funds that held closes in 2007, when 18 mega funds closed on more than $182 billion in equity raised. 

Mega funds, when will they return?  I'd love to see a five year chart of purchased political influence for the top PEU firms.  Seeing a Mega hires list, that would be interesting.  Red and Blue love PEU.

Update 4-3-17:  Despite TPG's continued fundraising success David Bonderman had difficulty selling his PEU's IPO.   For now, it's a no go.

Shameless Carlyle Takes Third Run at Japan

The Carlyle Group will launch a $2 billion fund targeting Japanese acquisitions.  It will be interesting to see how Carlyle's offers are received.  Japanese managers traditionally felt great responsibility for their workers and the quality of their products.  When a company bore public shame due to poor products/services or harm to employees, Japanese managers were known to commit hari Kari, ritual suicide.

Ritual suicide eased during the last two decades as Japanese management imitated its shameless American counterparts.  On both sides of the Pacific, men in their 50's who'd lost their job and faced financial ruin commited hari cari in Japan or suicide in the United States.  This is the ugly, unspoken side of job loss.

Famed quality guru Dr. W. Edwards Deming spoke in 1984 about the U.S. and Japan:

Acquisition, creative accounting... There's a better way, a better way to protect investment.  That is with plans that keep the company in business and which will provide jobs, more jobs.  Unemployment is not inevitable.  Unemployment is a sign of bad management.  Lost America.

Japanese management has not the Deadly Diseases.  They have not the annual rating.  They have not mobility of management or mobility of anything else.  They do have constancy of purpose.  They intend to stay in business.  They do a pretty good job of it too, you have to admit.  There is not takeover.  There is not leveraged buyout   Management and everybody in the company have one aim.  Quality.

Leveraged buyout is the precursor to private equity.  Private equity exploded after 2000, so much so world governments were encouraged to cater to private equity firms. 

Dr. Deming referred to America's "storehouse of unemployed:"

When you think of all the under use, abuse and misuse of people of this country  this may be the world's most underdeveloped nation. Number One.  We did it again.  We're #1....for underdevelopment.  Our people not used.  Mismanagement.  Misused, abused and underused by management that worships sacred cows, a style of management that was never right.

Private equity underwriters (PEU's), like The Carlyle Group, implemented a new set of sacred cows, leverage, liquidity recapitalization, and preferred carried interest taxation.  Carlyle co-founder David Rubenstein sells his value to society via "patriotic philanthropy." Yet, the storehouse of unemployed remains with many college graduates unable to find jobs..

Dr. Deming once taught Japanese managers his theory and methods.   His teachings improved lives for millions of people.  The Japanese named their Quality Prize for Dr. Deming.  In Dr. Deming's final years he called for Transformation of Management. In his vision leaders would understand Systems, Knowledge, Variation and Psychology and their interactions.  Leaders would work toward win/win and providing jobs. 

Carlyle's Japan Partners III faces Japanese conglomerates, historically reluctant to sell non-core businesses, and owners wary of loading companies with too much debt.  PEU's have work to twist Japan into their image. 

Can private equity firms put more nails in the coffin of Dr. Deming's teachings?  How long before Japan starts a Rubenstein Prize for greatest exit?  For a balancing measure to ever ascending PEU wealth, watch the suicide rate for men in their 50's who work for private equity affiliates.

Update 11-23-14:  The Carlyle Group's David Rubenstein said Japan is now ready for private equity and its financial machinations which cause distortions.  “I think we are going to find more opportunities in Japan than before,” said Mr. Rubenstein, who is raising a new fund to invest in the country. “I do think that Japan will see a bit of a mini boom in private equity investing as the government encourages more and more private-equity deals.”

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

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

PEU Richard Haass Holds Book Signing

Wasingtonian reported on the D.C. soiree for Richard Haass' newest book.  Fellow private equity underwriters turned out to support Haass. 

Haass has been a PEU since 2007.  He saw the potential for PEU influence in early 2006:

The world’s 190-plus states now co-exist with a larger number of powerful non-sovereign and at least partly (and often largely) independent actors, ranging from corporations to non-government organisations (NGOs), from terrorist groups to drug cartels, from regional and global institutions to banks and private equity funds.

I see private equity as belonging toward the terrorist/drug cartel end of the independent actor spectrum.  Certainly, not everyone agrees, as politicians Red & Blue love PEU.  D.C. falls all over them.

PEU ETF's Low Returns, High Fees

The MarketWatch headline read:

Private-equity ETFs aren’t fit for the public 
Commentary: High-cachet, high-cost offerings don’t live up to their billing 

The article went on to say Private Equity ETF's have poor long term returns, in direct contrast to 30% return on equity numbers bandied about by The Carlyle Group's David Rubenstein.  

The piece also stated PEU ETF's have high fees.  It will be interesting to see if individual investors end up like public pension funds, chasing promises of high returns. 

PEU Petraeus to Join KKR?

Bloomberg reported:

KKR & Co. (KKR), the private-equity underwriter (PEU) run by Henry Kravis and George Roberts, is in discussions with former Central Intelligence Agency Director David Petraeus about a role at the company, according to a person with knowledge of the talks. 

It hasn’t been decided yet what role he would have at KKR, said the person, who requested anonymity because the discussions are private. Petraeus and Kravis are friends and talk often, according to the person.

Petraeus would be the latest in a long line of  generals and political figures to cash in on the PEU side of the Global Corporate Monstrosity.  CNBC interviewed one this morning, Erskine Bowles.   Erskine lobbied for lower corporate taxes for his PEU brethren.  What will Petraeus pitch?