Altegrity Undone by Poor Quality & PEU Greed

WaPo reported on the USIS whistleblower settlement.  USIS had been owned by a series of private equity underwriters (PEU) since President Bill Clinton privatized government security investigations in the late 1990's'  The story stated::

665,000 cases had been dumped between 2008 and 2012. Internal documents “confirmed that USIS senior management was aware of and directed the dumping practices,” it asserted. The alleged motive was simple greed: “This practice was followed in order to meet USIS’s internal goals for completed cases and, therefore, to increase the company’s revenue and profits.”

The lawsuit cited emails from executives detailing the alleged practice, such as the one that proclaimed: “Shelves are clean as they could get. Flushed everything like a dead goldfish.”

PEU sponsored, PEU imploded.

And it documented how USIS raked in bonuses for turning around the cases quickly: $11.7 million between 2008 and 2010. A subsequent congressional investigation found that OPM seemed to be aware of the practice, and in 2011 staff members sent a letter to USIS’s vice president of field operation, asking him to explain how four investigators could have completed more than 13,000 reports — an average of 3,278 cases per employee — in one week.

At the time, USIS said the allegations did not reflect its core values. 

Quality matters not when the federal budget is a tool to push money to friends and political sponsors.

PEU Business Shift a Chinese Parable.

Bloomberg reported:

Plastic Christmas trees had been the Kao family's great moneymaker for years when Francis Kao told his father in 2001 that things could only go downhill from there.

Overlooking their 10,000-worker factory, Kao pointed nearby to the newly built campus of up-and-coming Huawei Technologies Co. as the symbol of the future.

"The high-tech industry is right by your side, but you're still sticking to the status quo," Kao recalls saying to his father, Michael. "How can the workers you employ stay cheap and the company continue to be successful now that service companies are hiring?"

The next year, in a complex and controversial deal the Carlyle Group bought in, and the Kaos reinvented themselves.  "I have never regretted leaving the Christmas tree business," Francis Kao said.

Meanwhile, labor costs in China have more than quadrupled since the 2002 decision by the Kaos. Services eclipsed manufacturing in 2012 to make up the largest chunk of China's economy.

For Carlyle, the Boto purchase didn't fare well. It exited the business about 6 years after its investment after years of rising labor and raw materials costs.

Washington Business Journal reported on a new Carlyle fund focused on Asia.

The D.C.-based private equity giant The Carlyle Group(NASDAQ: CG) is opening up new investments in Asia with a fresh $235 million investment fund, according to recent Securities and Exchange Commission filings.

The Carlyle Asia Structured Credit Opportunities Fund-A LP was first formed on Dec. 5, 2014, but closed its year-long pooled investment funding round on Dec. 4, 2015.

The new fund will package corporate debt into securitizations.  What looks good one moment can look awful ugly later.  Let's hope Carlyle's fund avoids the Botos, the Kao's Christmas tree company Carlyle lost to receivership in March 2008, just days before Carlyle's Guernsey based $22 billion mortgage security fund collapsed.  There may be lessons for investors today in this PEU parable.

Corker's Refiled Financial Reports Back to 2007

WSJ reported:

Sen. Bob Corker failed to properly disclose millions of dollars in income from real estate, hedge funds and other investments since entering the Senate in 2007, according to new financial reports filed by the Tennessee Republican. 

Mr. Corker late Friday filed a series of amendments showing that his personal financial reports as originally filed included dozens of errors and omissions.

Corker put the blame on accountants, even though the duty to accurately file is solely his.  

“I am extremely disappointed in the filing errors that were made in earlier financial disclosure reports,” Mr. Corker said in a statement.

Maybe those poor filing errors will feel horrible for making Mr. Corker look bad.

It's another glimpse into our world of abysmal leadership, where no one takes responsibility, quality is an ancient notion and honor has been replace by greed.  Well done, Mr. Corker, another accountant has been vanquished. 

Carlyle's Rubenstein Reiterates Energy Attactiveness

Business Insider reported:

The energy sector is about to throw up a once-in-a-lifetime investment opportunity. 

That is according to David Rubenstein, the billionaire cofounder and co-CEO of the alternatives giant Carlyle Group.

"Maybe the greatest energy investing opportunities we've ever seen" lie ahead, Rubenstein said December 9 at the Goldman Sachs Financial Services Conference in New York. 

"Distressed debt is very popular right now."

Distressed debt is the way Carlyle might lose current energy affiliates, like Niska Gas. 

It's also the way Carlyle might backdoor takeover other struggling energy companies.

The Carlyle Group shifted to a loss in the third quarter, which Rubenstein blamed on a one day stock market drop.  Carlyle's energy sector losses are much deeper than a bad trading day. 

Despite teasing CNBC in March that Carlyle would buy energy, Rubenstein said that is yet to happen.

Carlyle has done a good job of biding its time, and said prices still haven't reached a bottom. West Texas Intermediate crude oil dropped below $37 a barrel on Tuesday.  "We're quite pleased with our willingness to hold back."

Carlyle's $9 billion in energy dry powder in March is now $10 billion. It will be interesting to see when and how that is put to work.

Mutual Fund Run for PEU Bonds!

MarketWatch reported:

A high-yield mutual fund is blocking investors from withdrawing their money, in a rare and jarring move amid a severe downturn in below-investment-grade and distressed debt.

The move at Third Avenue Focused Credit Fund is intended to facilitate an orderly liquidation of the fund, which recently had $789 million in assets, down from more than $2.4 billion earlier this year.

Third Avenue Management's shareholder letter states:

"Investor requests for redemption, however, in addition to the general reduction of liquidity in the fixed income markets, have made it impracticable for FCF going forward to create sufficient cash to pay anticipated redemptions without resorting to sales at prices that would unfairly disadvantage the remaining shareholders."

Third Avenue's investment theory failed.  Here's their take:

When we launched FCF in 2009, we expected not only to add a differentiated product to our fund line-up which complemented our platform but would hopefully provide outsized returns in the credit markets, including investments in special situations. As the Fund grew over the years, we were able to find unique and special investments. Unfortunately, the present environment has harmed our ability to successfully implement that strategy.

Wow, how hard is it to say we made the wrong investments/bets in low grade corporate bonds?  Many private equity affiliates floated bonds to fund deals and special dividends for their PEU owners. 

A Bloomberg story showed another indicator of the current turbulence:

"...over the past two months as BlackRock Inc., Fortress Investment Group and Bain Capital closed hedge funds after running up losses."

It's an interesting time when the big money boys but no longer trust one another to make good on their debts or bets.  Panic, like greed, ain't pretty.

Caesar's Bond Battle

Forbes reported on the two sides fighting over Caesar's Entertainment bonds and the legal ploys involved, which included a possible House amendment to tip the scales. Each side has a storied group of billionaires.

First lien holders include Brigade Capital Management, Aurelius Capital and the largest first lien holder, billionaire Paul Singer’s Elliott Capital Management; second lien holders include Howard Marks’ Oaktree Capital Management, Centerbridge Partners, Appaloosa Management and Tennenbaum Capital Partners.

The three biggest shareholders of the CEC parent are private equity backers Apollo (Leon Black) and TPG Capital (David Bonderman), and the nearly $20 billion hedge fund Paulson & Co. 

Alabama Senator Richard Shelby introduced a bill amendment that would have stacked the deck in favor of the PEU boys, Apollo, TPG and Paulson & Co.  

Paulson & Co. is the fifth-largest contributor to Sen. Shelby’s leadership political action committee for the 2016 election cycle, donating $52,500.

It's not clear how many Apollo or TPG affiliates support the Alabama senator.  Fortunately the amendment did not make the final bill, but the moves portend the PEU boys will seek the intervention of elected officials on specific deals.  

HuffPo spun the amendment as private equity trying to harm pension funds.  It all depends on which side of the bankruptcy the pension fund sits.  Do pension funds hold more junk bonds than private equity investments?  

It would be an odd time for elected officials to remove investor protections in the case of bankruptcy, especially given the expected wave of energy related implosions due to low oil and gas prices.  The PEU boys have long profited from politicians willing to serve their interests.  The failed amendment is but on step on that path.     

Recall that financial crises arise when the big money boys no longer trust one another to make good on their debts or their bets. 

Carlyle's China Fishery Nearly Belly Up

Moody's downgraded Carlyle Group affiliate China Fishery for the second time in two months.  The first downgrade came in mid October.  It warned of a worsening financial situation.  That happened:

China Fishery Group Ltd. failed to repay a $31 million installment due earlier this month on a $650 million loan, according to Standard & Poor’s.

Moody's second and more dire downgrade came today.

On 26 November 2015, Pacific Andes International Holdings Limited (unrated), the parent of China Fishery, suspended trading in its shares and announced that one of the lenders of China Fishery had taken certain actions.

At the same time, Moody's notes from the auditing firm KPMG's website that Edward Middleton, Fergal Power, and Kris Beighton -- all KPMG employees -- have been appointed by the High Court of Hong Kong as joint and several provisional liquidators of China Fishery.

While the appointment of the provisional liquidators is intended to preserve the assets of the company, it also indicates that the process of debt restructuring has become more challenging.

In addition, the appointment of the provisional liquidators has triggered the acceleration of the repayment of its senior unsecured bonds due July 2019. 

Interesting that KPMG employees will liquidate China Fishery given that four KPMG senior partners were arrested for tax evasion in Ireland.

China Fishery's ownership is as follows:

China Fishery Group Limited is headquartered in Hong Kong and listed in Singapore. It is engaged in the Peruvian fishmeal and fish oil business and fishing fleet operations. China Fishery is 46.5% effectively owned by the Pacific Andes group, through Pacific Andes International Holdings Limited (PAIH, unrated), a Hong Kong-listed integrated fish and seafood products processor. The Carlyle Group, a global alternative asset management firm, holds a 6.02% stake in China Fishery Group.  

Owners have fiduciary duty to repay bonds due July 2019.

The company’s 2019 bonds were bid at 33 cents on the dollar as of 10:21 a.m. in Singapore, down 34 percent on the day, according to prices from SC Lowy Financial (HK) Ltd.

The Carlyle Group has billions in dry powder but I'll venture they let China Fishery die.

Update 6-17-19:   KPMG will pay a $50 million fine to settle SEC allegations that it not only altered past audit work, but did so after receiving stolen information from an industry watchdog.  

KMPG officials sought and obtained a list of inspection targets by the PCAOB because the firm had experienced a high rate of deficiencies. With the data, the former employees oversaw a program to revise certain audits to reduce the likelihood government inspectors would find shortfalls.

J. Crew Went PEU

Bloomberg reported:

J. Crew’s $500 million 7.75 percent senior unsecured bonds maturing May 2019 last traded at 25.5 cents on the dollar on Nov. 24, losing 60 percent in value this year, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The securities, which were issued in October 2013 at par, were trading above 90 cents on the dollar as recently as April. The precipitous fall marks J. Crew’s bonds as the worst-performing retail debt in the U.S.

Summer 2014 found J. Crew floundering despite having the Obama girls don their clothing for the inauguration in 2013:

Mickey Drexler has amassed more than $350 million from the leveraged buyout of J. Crew Group Inc. even as he struggles to revive sales and restore the apparel chain’s fashion cachet.

Three years after taking the retailer private with private-equity firms TPG Capital and Leonard Green & Partners LP, J. Crew’s chief executive officer is battling slowing sales as shoppers decamp to more affordable, trendier rivals. 

It took a mere four years for J.Crew's staggering debt to become an anchor.  As for the meme that private equity are skilled operators consider these words:

Drexler acknowledged earlier this year that the flagship brand had gotten away from its classic roots, and that quality was wanting in some items while fits were wrong in others. 

Lest the children stay awake at night worrying about J. Crew, parents please tell them.

Drexler invested $11 million of his own money when he was named CEO in 2003. In the 2011 buyout, his stake was worth about $301 million -- he pocketed $202 million of that and rolled the rest into an 8 percent stake, according to company filings. He also got $55 million in dividends as part of the $681.5 million J. Crew has paid the owners since going private.

In all, Drexler, 69, has accrued about $380 million since becoming CEO, including options awards, salary and bonus, according to company filings and a Bloomberg News analysis. He and his private-equity partners have recouped over half their $1.23 billion investment.

Mickey and J. Crew's PEU owners will be OK.  Sleep tight.  

Free Beacon Causes Clinton PEU to Disappear from Web

It took less than a week for the Clinton Foundation's Colombian PEU to vanish from the internet.  Last Thursday the Washington Free Beacon reported on Fondo Acceso, a private equity firm half owned by the Clinton Foundation.  That information is no longer available.  However, this is:

How many donors gave to the Clinton Foundation so they could buy and flip Colombian companies?  It's fitting as private equity underwriters are virtually tax free operations in the U.S. and their fees are as mysterious as the Clinton Foundation's vanishing PEU.

Hillary Clinton is Wall Street

Democratic Presidential hopeful Hillary Clinton botched her debate question on her longstanding ties to Wall Street and her reliance on their campaign donations.

CLINTON: So I represented New York, and I represented New York on 9/11 when we were attacked. Where were we attacked? We were attacked in downtown Manhattan where Wall Street is. I did spend a whole lot of time and effort helping them rebuild. That was good for New York. It was good for the economy, and it was a way to rebuke the terrorists who had attacked our country.

The reaction to Hillary's wrapping her ties to the greed and leverage boys in a 9-11 flag was swift.  WaPo reported:

Wall Street is not a warm and fuzzy friend in need of comfort in the minds Americans still digging themselves out from the Great Recession and monstrous housing crisis.

... just the day before Saturday's debate, millions of Americans watched in horror as France, this country's first ally, endured its own large-scale terrorist attack. Especially in this context, it was not -- and on this there really is little room for debate -- appropriate to summon the memories of 9/11 or the fallout from a terrorist attack to explain her connections to Wall Street and its campaign cash. 

A week after the debate NYT ran a piece on Hillary's Wall Street "image problem."  This piece made no mention of The Clinton Foundation, which employs similar methods as Wall Street by raising and accounting for funds. 

NYT did not mention the Clinton Foundation having to refile years of tax returns with the IRS for omitting donations from foreign governments, some unauthorized, while Hillary served as Secretary of State.  The Clinton's skirted the agreement that allowed the foundation to keep raising money from foreign governments and circumvented the ethics procedure within the State Department for approving Bill Clinton's speeches.

The Clinton Foundation also funnels donor money to friends and insiders.   

And efforts to insulate the foundation from potential conflicts have highlighted just how difficult it can be to disentangle the Clintons’ charity work from Mr. Clinton’s moneymaking ventures and Mrs. Clinton’s political future.

Fall 2013 saw Hillary move into offices at the foundation’s new headquarters in Midtown Manhattan, occupying two floors of the Time-Life Building. Hillary is in close proximity to Wall Street.

The foundation, which has 350 employees in 180 countries, remains largely powered by Mr. Clinton’s global celebrity and his ability to connect corporate executives, A-listers and government officials.

Recent revelations show The Clinton Foundation a 50% owner and sole manager of a $20 million South American private equity firm, Acceso.   The Clinton Foundation holds an equity stake in two Colombian companies, Alimentos SAS and Fontel SA.

Many of the Clintons' speeches the last decade have been to private equity audiences.  Bill Clinton advised Ron Burkle's Yucaipa and Teneo.  Chelsea worked for Avenue Capital and sits on the IAC board.  Hillary spoke to numerous PEUs after retiring from public service.

The Clintons are Wall Street, plain and simple.  It's not an image.  It's a fact.

Note:  PEUReport found an undeclared speech Bill Clinton gave to The Carlyle Group and has numerous posts on the Clinton Foundation.

Clinton Foundation Runs $20 Million PEU

The Washington Free Beacon reported:

The Clinton Foundation is operating a $20 million private equity firm in Colombia, raising concerns from government and consumer watchdog groups who say the practice is unusual and could pose a significant conflict of interest. 

The line between the firm and the Clinton’s nonprofit world is hazy. Fondo Acceso is run out of the Clinton Foundation’s Bogota office and staffed by foundation employees, a representative at the office told the Washington Free Beacon on Tuesday. 

The Clinton Foundation has long been full of conflicts of interest and slipshod accounting.  Those are necessary to send big money to friends.

The firm is managed by Carolina Botero, who is also chief financial officer at the Clinton-Giustra Enterprise Partnership. It lists various Clinton Foundation and CGEP officials as directors in its corporate filings. The Clinton Foundation’s tax returns list Fondo Acceso as a related corporation in which the foundation holds a 50 percent stake.

Colombian companies that want to apply for venture funding from the Fondo Acceso must also sign a contract turning over financial and internal information to both the private equity firm and the Clinton Foundation.

Here are Acceso's affiliates as of a July 2012 presentation:

There's a new method for taking advantage of banana republics, the PEU way.

 The Clinton's helped create the system, thus they know how to navigate PEU waters.

Carlyle's PQ Corporation Fined $1.7 Million for Pollution

Philadelphia Business Journal reported:

The Pennsylvania Department of Environmental Protection (DEP) has fined chemical company PQ Corp. $1.7 million for air quality violations in Chester, Pa.

According to quarterly emissions reports submitted by PQ to the DEP, the Malvern-based company exceeded several permitted emission limits for pollutants like carbon monoxide and nitrogen oxides, and failed to satisfy the data availability requirements for their systems. The assessment covers the period between August 2011 and June 2013.

It is majority owned by private equity firm The Carlyle Group, which bought the company in 2007 for $1.5 billion.

In this case PEU stands for PEU.  The company happens to be owned by The Carlyle Group and a smattering of private equity underwriters.

Carlyle Faces Credit Questions

 Bloomberg reported:

After two weeks of trying to peddle debt backing the largest private-equity buyout of 2015 Wall Street’s biggest banks have given up -- at least for now.

Lenders led by Bank of America Corp. and Morgan Stanley postponed marketing $5.5 billion of loans and bonds they underwrote to finance Carlyle Group LP’s takeover of Symantec Corp.’s data-storage business as investors shy away from riskier corporate debt.

The fall 2008 financial crisis happened when the big money boys no longer trusted one another to make good on their debt, much less their credit bets.

Carlyle affiliate Accudyne had its debt downgraded by Moody's:

Moody's expects further revenue declines and earnings erosion, along with sustained high financial risk. Cash flow is unlikely to meaningfully reduce debt. The business also faces currency transaction risk as a substantial portion of sales are denominated in currencies other than the US dollar.

The Carlyle Group also sponsors Project Service, which came under fire for not paying subcontractors renovating Connecticut rest areas.

As the nearly $150-million job is at its end, subcontractors who are still owed a collective $5 million for work they have completed use less-than-glowing words to describe the two corporations that ran the six-year project: Centerplan Construction Co. of Middletown and Project Service LLC of Milford.

Lastly, Carlyle GMS Finance reported in its latest 10-Q:

On September 25, 2015, the Company issued a capital call and delivered capital drawdown notices totaling $26 million.

The credit noose is tightening.

Update 11-19-15:  Reuters reported on investors reduced appetite for risky debt.  "On top of that, the recent sharp drop in prices of riskier debt has left some nursing losses." Journal Media reported "Revenue for S&P 500 companies has shrunk in all three quarters so far this year."  ZeroHedge reported "Goldman admits this (record low negative swap spreads) signals funding and balance sheet strains are worsening since August."

Update 11-21-15:  Institutional Investor ran a story on the pause in PEU out-performance since the financial crisis.  Their story said PEU deals are up to 10x EBDITA but the big players cans still source financing.  Have they read about Carlyle's struggling Veritas deal?

Update 12-26-15:  Deal closing has been pushed back from January 1 to January 29.

PEU First Lady

A Carlyle Group press release on the private equity sponsored veterans summit stated:

Investing on behalf of more than half of the public pensioners in the United States, the private equity industry represents hundreds of companies and millions of employees.

The piece quoted Blackstone's Stephen Schwarzman, KKR's Henry Kravis, Carlyle's Daniel D'Aniello and TPG's David Bonderman.  This effort will target employment for veterans.  One might wish to consider how these firms treated employees, including veterans the last several decades.

A former financial reporter wrote in 2010:

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

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

I watched a video interview of (David) Rubenstein and his arrogance is really beyond tolerance. He was going on about the debt ceiling problem and how there would need to be cuts in services and higher taxes. When the reporter asked him about tax on carried interest he turned really disdainful and said that this "only" amounted to $22 billion over some number of years and this was not serious money. Boy, nothing like everybody doing their small part to save the country from oblivion!

How many veterans were taken apart by PEU greed that hollowed out our economy?  That number should be compared to the number they employ as a result of their summit and PEU veterans initiative.

As for Carlyle's existing to corrupt politicians that's the First Lady on their home page.  I believe the Obama's have a bright PEU future after their stint in the White House. 

Securus Had Multiple PEU Owners.

The Intercept reported:

" ... an anonymous hacker who believes that Securus is violating the constitutional rights of inmates — comprise over 70 million records of phone calls, placed by prisoners to at least 37 states, in addition to links to downloadable recordings of the calls. The calls span a nearly two-and-a-half year period, beginning in December 2011 and ending in the spring of 2014. 

Particularly notable within the vast trove of phone records are what appear to be at least 14,000 recorded conversations between inmates and attorneys, a strong indication that at least some of the recordings are likely confidential and privileged legal communications — calls that never should have been recorded in the first place. 

Who owned Securus between December 2011 and spring of 2014?  H.I.G Capital owned Securus from 2004 to May 2011.  H.I.G and Securus buyer Castle Harlan waited until November 2011 to announce the deal.  That press release stated:

Castle Harlan, Inc., a leading global private equity investment firm, today announced the acquisition of Securus Technologies, Inc. from H.I.G. Capital, a private equity firm based in Miami, FL. The transaction closed on May 31, 2011.

Securus Technologies is the leading provider of secure inmate telecommunications for the corrections industry, serving 2,200 facilities across 44 states, the District of Columbia and Canada. It installs and centrally manages state-of-the-art call management and communications systems for use by prisons and jails, and offers a variety of convenient payment products and services to inmates and their friends and family members.

“We are excited to be partnering with Castle Harlan for the next stage of the company’s growth,” said Richard A. Smith, CEO and President of Securus Technologies. “With the addition of Castle Harlan’s broad business experience and financial expertise, we are confident that our company’s future operations will continue to be greatly enhanced.”

Castle Harlan said that the current management of Securus Technologies, which has been highly successful at Securus and in prior roles in the telecommunications industry, will be partners in the investment and will remain in place.

“Securus is the technological leader in its field and has an exceptional management team with great depth and experience in telecommunications. We believe that Securus is uniquely positioned to continue to grow in the corrections market,” said William Pruellage, Co-President of Castle Harlan.

“Securus’ competitive advantages have already started to produce results during our ownership and we are confident that the management team will lead the company to continued growth and success,” said Anand Philip, a Castle Harlan Managing Director.

Harlan Castle sold its stake in Securus to Abry Partners in March 2013. 

Abry Partners is acquiring a 66.9% stake in prison phone operator Securus Holdings Inc. from Castle Harlan in a transaction not officially announced by the buyer, but revealed in regulatory filings. 
 
Also taking additional minority stakes in Securus are HarbourVest Partners, Redoak Investments LLC and Mesirow Financial Capital Partners.

The deal could value the target at more than $700 million.  New York-based Castle Harlan bought Securus in 2011 for about $440 million.

Securus went through several sales just before and during the period in question. Each buyers aim was to fluff and flip the company.  Profits over principle is a familiar PEU theme, as is lack of government oversight and accountability.   

Update 4-26-22:  Abry Partners invested $100 million in comedian/actor Kevin Hart's new company.  HARTBEAT said it would produce and distribute television and film content focused on "comedic storytelling" and that it was in various stages of development or production on more than sixty projects.  The greed and leverage boys are rarely ha-ha funny.  They're more disturbing, like a twisted dark comedy.

PEU Return Theory Needs Revision

ValueWalk reported:

Funds racked up abysmal results last summer, with August showing the biggest monthly loss since October 2008. 

Then the prominent Bain Capital Absolute Return Capital hedge fund announced in early October that it would close, having lost money for three years. Soon after, the well-known Fortress Investment Group said it would shut its flagship fund after losing 17% for the year through September.

At the end of October, Carlyle Group’s Claren Road Asset Management LLC said that a heavy demand from investors wanting their money back would not be met immediately. Instead, two-thirds of the $2 billion in redemption requests would be spread over a number of quarters, a relatively uncommon practice used when heavy withdrawals are seen as potentially disruptive to fund investing strategy.

All three hedge funds have PEU sponsors.  Their declines and rollups punch a hole in the theory that private equity performs better than the overall market in difficult times and outperforms the market in good times.  One failure of a theory requires its modification. 

Carlyle Refiner Dumps Bakken Oil: BOEM JV in Jeopardy?

Reuters reported

Philadelphia Energy Solutions has already cut its purchases of oil from North Dakota by 80 percent, switching to imports from Nigeria, Chad and Azerbaijan.

The problem is that the drop off in production has eliminated the discount that Bakken oil traded at to WTI, making it more expensive than oil from other areas that are still suffering from excess supply. Transporting oil by rail can add $10 to the price of a barrel of oil, but importing by tanker only adds $2 to $3 per barrel. The rail transport costs have made North Dakota unattractive for refiners.

“They are looking for the lowest cost supplies,” Sandy Fielden of RBN Energy told Reuters, referring to refiners. “A few years ago, that was North Dakota, but not today.” 

This is a sea change for The Carlyle Group's Philadelphia Energy Solution, which shifted from foreign oil to cheaper domestic crude one year ago.  Recall President Obama's White House helped Carlyle land the Philadelphia refiner, which required public subsidies to develop the rail capability to handle huge amounts of domestic crude.   

PEU Report quoted the company's SEC filing earlier this year:

The capacity of the North Yard terminal was expanded to 280,000 bpd in October 2014, allowing Refining to significantly increase the volume of domestic crude oil it processes. As a result, domestic crude oil comprised 65% of our crude oil slate in the fourth quarter of 2014 compared to 9% of our crude oil slate in the fourth quarter of 2012 (the first full quarter of operation of the Philadelphia refining complex under our ownership). On January 1, 2015, the North Yard terminal was contributed to Logistics, our wholly owned subsidiary. In connection with this contribution, Logistics and Refining entered into a long-term, take-or-pay commercial agreement with minimum volume commitments and related services and secondment and easement agreements. Accordingly, as of January 1, 2015, we conduct our operations through two business segments, refining and logistics, which are operated by Refining and Logistics, respectively.

Carlyle broke out the transportation division, PES Logistics, for a separate $250 million IPO, but neither PES or its logistics division has gone public to date.

In July PES still loved Bakken oil (according to Reuters):

Philadelphia Energy Solutions is pursuing a joint venture that would give the U.S. East Coast refiner greater control over its supply chain out of North Dakota's Bakken oil fields, the company has disclosed in federal filings ahead of a initial public offering.

PES, a joint venture partly owned by Carlyle Group LP , said in a filing that in early June, it entered into a preliminary agreement with Globe Resources Group, parent company of BOE Midstream. The deal would give PES controlling interest in a 210,000 barrel-per-day crude rail loading facility, nearly 1 million barrels of crude oil storage and a 39-mile pipeline in North Dakota.

The filing stated:

On June 9, 2015, PES LLC entered into a term sheet with The Globe Resources Group, LLC ("Globe Resources") relating to a proposed joint venture (the "BOEM joint venture") that would combine the businesses of Logistics and Globe Resources' wholly owned subsidiary, BOE Midstream, LLC ("BOEM"). PES LLC is expected to own its interest in the joint venture through a subsidiary of PES Holdings and will own an 85.25% interest in and control the BOEM joint venture. Globe Resources will own the remaining 14.75% interest in the BOEM joint venture.

BOEM's assets are located in North Dakota and include a 210,000 bpd capacity crude oil loading terminal, 882,000 bbls of tank storage capacity (of which 250,000 bbls of tank capacity is under construction) and a manifest train refined product loading terminal located on a 33-acre site adjacent to the crude oil loading terminal. The BOEM assets also include the Killdeer terminal, which provides 105,000 bbls of tank storage, and a 39-mile, 16-20-inch crude oil pipeline that operates between the Killdeer terminal and the crude oil loading terminal. We currently expect that Refining will contract with or otherwise utilize the crude loading terminal in connection with its purchase of crude to be transported to the Philadelphia refining complex.

BOEM currently has approximately $175 million of outstanding indebtedness under its revolving credit and term loan facility. We expect that the BOEM joint venture will assume or refinance the credit facility at the closing of the transaction and that such facility will not encumber or restrict the operations of Logistics or the MLP, if the Logistics IPO were consummated. In addition, we do not expect that the BOEM joint venture will contribute any of its assets to the MLP in connection with the Logistics IPO; however, if the BOEM joint venture and the Logistics IPO are consummated, we would expect the MLP to have a right of first offer with respect to any BOEM joint venture assets that generate qualifying income for tax purposes.

Except for certain exclusivity and confidentiality provisions, the term sheet is a non-binding agreement. We expect that the proposed BOEM joint venture will be completed in the third quarter of 2015; however, the completion of the transaction is subject to various conditions, including, among others, completion of due diligence and approval of definitive agreements by both parties. There can be no assurance that the proposed BOEM joint venture will be completed on the terms described above or at all. 

There have been no announcements on the deal closing.   Might Carlyle have shifted to foreign oil to get the BOEM assets at a deeper discount?  The folks at Globe Resources should call the Brintons family about how Carlyle snagged their family business via the back door.  Globe executives may want to reach out to Texas families stiffed by Carlyle's Barnett Shale player Vantage Energy.

How will this story turn out?  It might be another Carlyle betrayal, their first in the Bakken's.

Missed SEC Projection Caused by Rise of PEUs

NYTimes reported:

Fee secrecy is a major problem with hedge funds and private equity investments, according to Edward Siedle, a forensic pension investigator at Benchmark Financial Services in Ocean Ridge, Fla., and a former Securities and Exchange Commission enforcement lawyer.

“When I started with the S.E.C. 30 years ago, there were two things that the regulators and the regulated agreed on: Money management fees would come down over time and transparency would increase,” Mr. Siedle said in an interview. “But just the opposite has happened. Fees are at a historic high and transparency at a historic low.”

What happened over the last thirty years to make fees outrageous and super secret?  Private equity became ubiquitous. 

Blackstone Group started in 1985

Carlyle Group founded in 1987 

Apollo Global Management 1990

TPG started in 1992

Ares Capital began in 1997

Of the major PEU firms only KKR (1975) and Bain Capital (1954) were in existence when Siedle made his erroneous prediction.  Together these seven PEUs manage over $1 trillion in assets.  

A handful of politically connected corporate chiefs conspired with political lackeys to bring us high pension fees and historically low transparency.  The greed and leverage boys won again.  That's the history lesson.

Update 1-1-16:  CalPERS, a former equity owner of The Carlyle Group, declined the press to make private equity firms reveal the plethora of fees charged as it might alienate the PEU boys.

Carlyle's Getty to Enter "Limited Default"

WSJ reported:

A group of Getty Images Inc. bondholders struck a deal with the Carlyle Group CG +0.64% portfolio company to exchange some of the securities they hold for new senior debt while lending it $100 million of new money, according to Bloomberg News.

Moody's story is quite different:

Moody's Investors Service downgraded Getty Images, Inc.'s ("Getty") Corporate Family Rating one notch to Caa1 from B3 and the Probability of Default Rating to Caa1-PD from B3-PD reflecting Moody's view that the company will need more time than previously expected to improve credit metrics, including leverage and free cash flow. Moody's also downgraded the company's senior secured credit facilities to B3 and the senior unsecured notes to Caa3. In addition, the company announced plans to issue $252.5 million of new 10.5% senior secured notes in exchange for $100 million of cash plus roughly $240 million of existing 7% senior unsecured notes representing a 36% discount to face value. Moody's views this transaction as a distressed exchange and will assign a "Limited Default" or "LD" to the company upon closing. The LD designation will be removed in three days. The rating outlook is changed to stable from negative. 

Carlyle crammed down existing debt holders, will enter limited default for a mere three days and got a rating outlook upgrade for a company in a stressed market?

Carlyle's Booz News

MarketWatch reported:

Booz Allen Hamilton Holding Corporation (“Booz Allen”) BAH, +0.44% the parent company of management consulting, technology, and engineering services firm Booz Allen Hamilton Inc., today announced the sale of an aggregate of 13,000,000 shares of Class A common stock (“common stock”) on an underwritten basis by an affiliate of The Carlyle Group (“Carlyle”) to Credit Suisse Securities (USA) LLC.

Upon completion of the offering, Carlyle will own just under 20.0% of the outstanding common stock of Booz Allen. The offering is expected to close and settle on November 9, 2015. Booz Allen is not selling any shares of common stock in the offering and will not receive any of the proceeds.  

It's a Carlyle partial cash-in of a giant government contractor.  The prospectus stated:

Major government clients include the Department of Defense, all branches of the U.S. military, the U.S. Intelligence Community, and civil agencies such as the Department of Homeland Security, the Department of Health and Human Services, and the Department of the Treasury. We support these clients in addressing complex and pressing challenges such as combating global terrorism and improving cyber capabilities, transforming the healthcare system, improving efficiency and managing change within the government.  

Over 78% of our revenue in our fiscal year 2015 was derived from over 3,300 active task orders under indefinite delivery, indefinite quantity (ID/IQ) contract vehicles.

Booz drains more than the U.S. Treasury for revenue:

Our international clients are primarily in the Middle East and south-east Asia.  

How might Booz's work in those arenas drive more domestic business?  It's all about leverage in the PEU world.  Booz will likely leverage relationships of its newest board member, Melody Barnes.   

Reuters reported:

Booz Allen Hamilton Holding Corporation (NYSE:BAH), the parent company of consulting firm Booz Allen Hamilton Inc., has appointed Melody Barnes to its Board of Directors, effective immediately. Ms. Barnes, who is currently a domestic policy strategist and a Vice Provost and Senior Fellow at New York University, formerly served President Barack Obama as an Assistant to the President and as the Director of the Domestic Policy Council, which coordinates the domestic policy-making process in the White House.

Booz added a board seat for Mrs. Barnes, just as Tenet Healthcare did for Jeb Bush roughly one year after the White House omitted Tenet's ten deaths in Hurricane Katrina's aftermath from its Lessons Learned report.

Some board appointments grease the skids for new revenue sources, while others are a payback.  I'll speculate Melody Barnes is bit of both.  Booz's SEC filing on her appointment stated:

Ms. Barnes will receive a pro rata portion of the standard compensation for service on the Board. For the period beginning on August 1, 2015 through July 31, 2016, the standard compensation for the Company’s unaffiliated directors is equal to $200,000, to be paid $110,000 in restricted shares of Class A Common Stock of the Company, par value $0.01 (the "Restricted Common Stock"), granted under our Equity Incentive Plan, and $90,000 in either cash, Restricted Common Stock, or a combination thereof as elected by the director. 

Not bad for a few days work for a company owned 20% by The Carlyle Group.

W. Rejoins Fran Townsend as Security Keynotes

Washington Exec reported:

SAP NS2 will host its 4th annual Solutions Summit on Thursday, October 29 at the Fairview Park Marriott in Falls Church, VA.

This year’s theme is “Human Critical: Empowering People to Drive US National Security Services”. It will focus on the people that drive the missions and examining the relationship between technology and people and how the business of national security overall can be improved.

The Keynote Speakers for this event will be former President George W. Bush; US Navy Commander, US Cyber Security Command Director and NSA Chief Admiral Michael S. Rogers; and Chair of the SAP NS2 Board of Directors and EVP at MacAndrews and Forbes Holdings, Inc. Frances Townsend.

Many of us can't forget how this pair failed the people of the Gulf Coast after Hurricane Katrina and the abysmal investigation foisted on the public by Fran Townsend.

Her whitewash omitted the hospital with thirty six deaths to the benefit of LifeCare Hospitals, twenty six deaths, and Tenet Healthcare, ten deaths.  The Carlyle Group owned LifeCare and a year after Fran's horrific report brother Jeb Bush was appointed to Tenet's board of directors.

Many Americans would like our security apparatus trained upon the sick practice of political aggrandizement and covering for those who cover for others.  It's a system with no accountability, as evidenced by the rejoining of two colossal failures in national security.  I bet they yucked it up.

Update 11-7-11:  "Normally free from criticism, much less accountability, the careerists of Washington enjoy a lucrative racket." Fran and W. are grateful for that.

Pfizer's Chinese Quality Debacle

Chinese manufacturing sickened infants with tainted formula and killed Americans with toxic heparin.  Giant drug maker Pfizer experienced the Chinese way at its manufacturing plant in Northern China.  Bloomberg reported:

A Pfizer Inc. plant in China that was being inspected by Food and Drug Administration regulators in order to ship drugs to the U.S. kept a second set of quality and manufacturing records that didn’t match official ones, according to an FDA review of the facility.

During an April inspection of Pfizer’s plant in the northern Chinese city of Dalian, FDA inspectors said in their report that employees hid quality failures, used expired manufacturing materials or ones that hadn’t been recently checked, and retested failing products until they passed.

Outsourcing manufacturing to low wage parts of the world gives companies a financial advantage.  It does not mean the company produces quality products.   Globalization and buying on the cheap means often means companies no longer know their suppliers.  Supplier issues impacted Baxter's deadly Chinese heparin (246 deaths) and Yashili's melamine tainted infant formula (sickened 300,000 babies and killed six).

 It's a serious concern for Western pharmaceutical makers manufacturing in China.

The problems the FDA said it found at the plant resemble similar issues at Chinese drug ingredient suppliers for Western pharmaceutical companies, according to FDA inspection documents, previous Bloomberg reports, and a previous interview with the FDA’s top official in China.

 Back to the Pfizer plant in northern China.

At Pfizer’s Dalian plant, the agency observed that when tests of drug products failed to meet standards, the same products were re-tested until passing results were achieved, and that the original failures were never reported or investigated.

The FDA inspectors also noticed that one manufacturing unit had only one stand-alone toilet in significant disrepair 50 yards from the aseptic manufacturing unit. Inside the facility inspectors saw no hand washing station and an open pit appeared to be used as a urinal.

It' fitting as the Chinese have been pissing on U.S. consumers for years.

Chinese quality is an oxymoron.  As for Americans and our ability to get quality information, the FDA won't tell us which Pfizer drug this plant makes.  It looks like Uncle Sam is guarding the Chinese outhouse.

A story from February 2009 spoke to the newest plant at Pfizer Dalian:

The expansion, which amounts to a whole new manufacturing plant on the site, will triple the production capacity at Dalian for cephalosporin, an important antibiotic for the treatment of a number of bacterial infections. The number of cephalosporin vials produced at the plant will increase from 5 million units to 17 million units a year to meet the demands of the domestic and international markets.

The new sterile manufacturing areas will produce sealed vials of cephalosporin powder ready for reconstitution into an injectable form. The increase in production capacity required an investment by Pfizer of $6m, which underlines its confidence in the Chinese healthcare market and its new focus on Dalian being developed into one of its larger global manufacturing sites with continued investment.

The article spoke to Pfizer's quality efforts, some six years ago.

As well as opening the new facility, Pfizer has also been working with the Chinese authority to increase knowledge of the importance of drug safety and quality control.

Pfizer has made an effort to share its best practices in these important fields and is also supporting the Chinese efforts in promoting the high-quality supervision of pharmaceutical products.

Who knew high quality supervision and quality control involved two sets of books and retesting until some segment of the production run actually met standards? 

Carlyle Buys Second Bay Area Mobile Home Park

Determined to get the little guy's money at all costs The Carlyle Group will buy Plaza del Rey mobile home park in Sunnyvale, California for a reported $180 million.  If they can't get your retirement money they'll take your rent, maybe the whole house.

Update 11-26-17:  Mountain View Voice reported:  "A couple years ago, the Carlyle Group, a global private equity firm, paid $151 million to acquire Plaza Del Rey, one of the city's largest mobile home parks. Ever since, the park's residents have been hammered by the steepest rent increases in the park's history, said Judy Pavlick, founder of the Sunnyvale Mobile Home Park Alliance. In negotiation meetings, Carlyle executives told Pavlick they were watching nearby markets to see what prices Sunnyvale could bear."Poor Judy, greed came to her neighborhood and it doesn't want to leave, much less be rent controlled.

PEU Run on Carlyle's Claren Road

WSJ reported:

A struggling hedge-fund firm owned by Carlyle Group LP won’t immediately pay back about two-thirds of the nearly $2 billion that investors recently asked to withdraw, according to people familiar with the matter.

Investors badly want out of Carlyle owned hedge fund Claren Road.  Here's how Carlyle co-founder David Rubenstein characterized fleeing investors in the Q3 earnings call:

Well, I'd say first of all, over the last year -- it hadn't been a couple years, over the last year, the performance of hedge funds hasn't been what we hoped it would be, in either our emerging markets funds or in Claren Road -- that capital in the hedge fund business is not sticky capital. It depends usually on performance. A year or year and a half ago in Claren Road, they were turning money away, we were turning money away. And you get down and have a couple bad quarters and some people want their money back and that's part of the model. You given them their money back as best you can when that happens.

The last time Carlyle rolled up a hedge fund was July 2008.  That was four months after Carlyle stiffed a large number of investors with Carlyle Capital Corporation's bankruptcy.

It looks and smells like a PEU hedge fund run.  It's a dangerous time when the big money boys don't trust each other to pay back their debts.  That's when they turn to the little guy to make them whole.

Update 12-26-15:  Boxing Day finds Carlyle facing another $1 billion in Claren Road redemptions. 

Carlyle Group Posts Loss for Q3

MarketWatch reported:

Carlyle Group LP on Wednesday said it swung to a third-quarter loss as its private-equity and energy funds lost value, the pace of deals slowed and it took a big charge related to losses at a hedge fund it owns.

The Washington, D.C., firm reported a loss of $84 million, or $1.11 a share, compared with a profit of $25 million, or 35 cents a share, in the same period last year.

Carlyle's SEC filing stated:

GAAP results for Q3 2015 included loss before provision for income taxes of $(529) million 

Private equity underwriters use economic net income, a nonstandard way of reporting earnings.  The story highlighted areas in which Carlyle took losses, nearly every section of its giant portfolio:

Carlyle's funds that can earn the firm a slice of profits depreciated by 4% in the quarter, as its buyout funds lost 3% and its credit and hedge funds dropped 9%. The firm took a $162 million charge related to losses and investor redemptions at a credit hedge fund managed by its Claren Road Asset Management LLC.

Carlyle's newer energy and infrastructure funds fell 4%, while its older energy investments managed by Riverstone Holdings LLC plummeted 17%. Carlyle's real-estate funds were the lone risers, gaining 6%.

How many little investors want a piece of this in their retirement?

Carlyle said its assets under management at the end of September were $187.7 billion, down from $202.6 billion a year earlier and $192.8 billion at the end of June.

The last time Carlyle's AUM dropped significantly was the 2008 financial crisis and its aftermath.