Rubenstein Excited About Next SuperReturn Cycle

WSJ reported:

Private equity firms will be able to snap up businesses cheaper in 2016 due to jitters over the health of the global economy, according to Carlyle Group 's co-founder David Rubenstein. 

“You are going to see much more money invested [by private equity] because lower multiples will be prevalent,” he said. “There’s a recession every seven years and we haven’t gone more than nine years without a recession. The last recession ended July 2009, so [in] June 2016 some people say something bad is coming along.”

Private equity firms have been complaining about high valuations for businesses and how this has depressed private equity investment levels for the past two years.

Rubenstein stayed away from predicting a recession but the more distressed an economic sector the greater chance for private equity underwriters to bottom fish.  Carlyle's co-founders have a fresh $300 million between them to lure trophy firms.

Carlyle Dumps DGAM Hedge Fund of Fund Unit

The Carlyle Group will close Diversified Global Asset Management, its fund of hedge funds platform acquired in November 2013.  DGAM had $6.7 billion in managed and advised assets when it joined the Carlyle family.  It currently has less than $2 billion in assets under management.

DGAM's poor performance is similar to Carlyle's Claren Road hedge fund, which fell from $8.5 billion in 2014 to just over $1 billion, according to SeekingAlpha.

Between the two investment vehicles Carlyle saw AUM drop $12.2 billion.  It would be interesting to see DGAM and Claren Road's actual performance as Carlyle affiliates.

Update 2-28-16:  ZeroHedge reported investors withdrew $25 billion from hedge funds in January

Pervasive Management Loves Numbers, Not People

Data and analytics are buzz words in the C Suite.  Many firms are hiring Chief Data Officers (CDO).  That CDO is different than collatoralized debt obligations, but both have their root in complexity and mathematics.

Modeling is not new in the financial world.  Wall Street used statistical algorithms to destabilize trading exchanges and convince investors inherently risky products were safe.  Consider the case of David Li whose statistical models somehow made junk securities Triple A rated.

He just invented the model. Instead, we should blame the bankers who misinterpreted it. And even then, the real danger was created not because any given trader adopted it but because every trader did. In financial markets, everybody doing the same thing is the classic recipe for a bubble and inevitable bust.

Correlations are statistical associations which can change at any time.  They are not cause and effect.  Consider the Super Bowl winner's impact on the stock market.

You may not know it, but the winner of this year’s Super Bowl will be a pretty reliable predictor of how the stock market performs in 2016.  

This phenomenon has an amazing success rate: 82%. In fact, the winning NFL team has tracked how the markets fared the last seven years in a row, as well as for 40 of all 49 Super Bowl years.

Robert H. Stovall, an analyst who’s popularized the predictor, admits it has no grounding in fact. “There is no intellectual backing for this sort of thing,” he said in an interview with the Journal, “except that it works.”

Corporate executives do many things with data, a number of which also have no intellectual backing.  They optimize executive compensation to the detriment of the company and its employees.


HBR noted the latest management obsession and suggested asking questions about algorithms/models.

1. What was the source of your data?
2. How well do the sample data represent the population?
3. Does your data distribution include outliers? How did they affect the results?
4. What assumptions are behind your analysis? Might certain conditions render your assumptions and your model invalid?
5. Why did you decide on that particular analytical approach? What alternatives did you consider?
6. How likely is it that the independent variables are actually causing the changes in the dependent variable? Might other analyses establish causality more clearly?

Knowledge of variation, analytical vs. enumerative statistics and subject matter expertise are also critical.   It's important to know how numbers are generated/calculated.  It's important to look at data over time with an eye on improving quality.  And it's critical to remove threats, fear and intimidation so numbers can be honest and accurate.  Most important leadership should be in relationship with the people they support.

That hasn't been the case for quite some time in America's hallowed halls of leadership.  Management likes numbers that produce selfish rewards.  They prioritize additional debt and interest expenses over employee raises and maintaining benefits. They spend on faster computer systems and complex algorithms so they can deal with numbers, not real people. 

Senior executives hire consultants who know better than to return bad news.  Thus, they craft questions and surveys that limit employees and customers ability to give feedback because the C Suite really doesn't want to hear what people think.  Executives shoot the messenger when the rare brave soul penetrates the C Suite's Castle walls with salient observations.

Analytics enable executives to avoid interacting with pesky customers or employees.  Many senior managers will delight in replacing employees with algorithms and machine learning.  UBS predicts the Fourth Industrial Revolution will benefit the richest.  The more things change the more they stay the same.  

Veritas to Migrate Florida Facilities to India

The Carlyle Group closed on Veritas three weeks ago.  Their press release stated:

Veritas CEO Bill Coleman said, “I am thrilled with the possibilities for innovation and client service that we now have as a stand-alone company. We will continue to be the go-to source for solving organizations’ increasingly complex information management challenges. The global Veritas team, with Carlyle’s support, is ready to perform for our customers.”

American Bazaar reported:

Veritas has about 1,700 employees, with Pune, Maharashtra, being a major center. Coleman said he plans to migrate some of his facilities from Florida to India. 

Carlyle knows how to offshore to maximize profits.  Veritas savings are needed to pay interest and Carlyle's annual management fee.  It's the PEU affiliate way.

CEO Bill Coleman spoke Down Under:

He said the company would not be slashing jobs as a result of being owned by private equity, and would be building for long-term growth and a future IPO.

Rest assured Veritas is no stand alone.  It has a greedy sponsor.

Update 2-22-18:  Gone is Veritas big splashy meeting in Las Vegas.  Carlyle replaced it with a series of regional confabs.  Carlyle kicked upstairs the man that drove $800 million in value from Veritas prior to its PEU buyout.   He's now a Carlyle operating executive.

Carlyle Group Engages Renee James

A Carlyle Group press release announced the hiring of yet another insider with input into government strategy in the telecom, media and security arena:

Global alternative asset manager The Carlyle Group (NASDAQ: CG) today announced that Renée James, former President of Intel Corporation, will be engaged as an Operating Executive by the global Telecommunications, Media and Technology (TMT) sector team. She begins her duties on February 29^th.

As an Operating Executive, Ms. James will advise the Carlyle team on industry and operational due diligence for potential investments and may serve on boards of Carlyle portfolio companies in her area of expertise.

Ms. James will work out of Carlyle's Silicon Valley office.  Their new hire serves on President Obama's National Security Telecommunications Advisory Committee.  Luck for her the NSTAC's May meeting is in Silicon Valley and the November meeting will be in Washington, D.C., Carlyle's home base.

The government touts the NSTAC on their website:

Throughout the NSTAC’s history, five key themes continue to emerge as their major areas of focus:

• Strengthening national security

• Enhancing cybersecurity

• Maintaining the global communications infrastructure

• Assuring communications for disaster response

• Addressing critical infrastructure interdependencies and dependencies

Carlyle intends to make money from reading the tea leaves and investing a portion of its huge stash of dry powder in the Security Telecom arena.  With Ms. James they'll have a tea maker on the inside.

Puerto Rico Recruits Greed & Leverage Boys with "No Tax" Residency

The Guardian reported:

Locals were less than pleased about the sight of some of the world’s richest people lounging on Puerto Rico’s idyllic beaches plotting how to get even richer by exploiting the island’s $72bn debt crisis – a crisis that has pushed millions into poverty and brought the island’s schools and hospitals to breaking point.

Hedge funds bought Puerto Rican debt at a discount, then pressed for repayment.

Billionaire New York hedge fund manager John Paulson invited hundreds of financiers to swap the bitter chill engulfing Wall Street for the sunny beaches of Puerto Rico for the weekend, if not for good.

At an investment conference held a short walk from the soft sands of Condado, east of old San Juan, Paulson, most famous for making a $4bn killing on the collapse of the sub-prime mortgage market, pitched Puerto Rico as a new tax haven with “the potential to become the Singapore of the Caribbean”.

Paulson, who is spending more than $1bn on luxury hotels and resorts on the island, encouraged his fellow financiers to help him turn around the island by moving there and, in doing so, saving themselves a small fortune in tax. 

More than 1,000 people, including private equity tycoons Nicholas Prouty and Michael Tennenbaum, have already taken advantage of the island’s “aggressive tax incentive” laws 20 and 22 that allow Americans to pay zero tax on US income if they spend at least 183 nights on the island. They also get to keep their US citizenship and passports, which they would have to surrender if they moved to other tax havens like Singapore.  

The greed and leverage boys manipulate dislocation to their perpetual advantage.  Politicians are but a tool to be used.  In this case eminent domain has been used to seize homes and demolish them in order to build a hotel and casino.  It's the state of America and its territories, where politicians Red and Blue love PEU.

Carlyle's AUM Drops by $5 Billion

From September to December 2015 The Carlyle Group experienced a $5 billion drop in assets under management.  AUM fell from $188 billion to $183 billion over the three month period.

The earnings call highlighted the beating Carlyle has taken in the hedge fund arena:

Hedge fund AUM declined to $8.3 billion as of the end of 2015, compared to $13.4 billion as of the end of 2014 and we expect AUM runoff of approximately $3.1 billion in 2016, which redeemed assets are sold and returned to investors.

People want out of Carlyle's hedge funds.  We'll see if they want in on CG stock. 

What Policy Makers Learned at Davos

1.  With negative rates
2.  People will need to rush to yield
3.  Which can only be met by the greed and leverage PEU boys
4.  Who soon will have investments for unaccredited investors.
5.  Those same PEU boys sponsor our elected officials
6.  And hire captured policy/regulatory high ups
7.  After their "public service."

Get the picture.  They screw us to enrich themselves. 

HCP Writes Down Equity for Carlyle Group's ManorCare

Six years ago Dealbook reported:

The Carlyle Group solidified its standing as one of the year’s busiest deal makers this week with an agreement late Monday to sell the real estate of its big nursing home operator, HCR ManorCare, to the real estate investment firm HCP for about $6.1 billion.

Under the terms of the deal, Carlyle will sell HCR ManorCare’s real estate to HCP for $3.5 billion in cash and HCP stock worth $847 million at Tuesday’s closing share price. Another $1.72 billion will come from the reinvestment of HCP’s existing debt investments in HCR.

HCR, which will lease back the 338 properties while still operating them, will wipe out nearly all of its debt. It will still be controlled by Carlyle, though HCP will gain the right to buy a 9.9 stake in the nursing home operator for $95 million.

HCP's stock imploded today, mostly due to its deal with Carlyle's ManorCare.  MotleyFool reported:

HCP warned that HCR ManorCare continued to face challenges, which it expects will continue into 2016. The REIT noted that "reduced growth outlook for the broader post-acute/SNF industry indicates challenges to the improvement in HCRMC's financial performance over the next few years."

Its recently filed annual report discloses that the company generated 23% of its revenue from HCR ManorCare in 2015.

The company took an $817 million impairment charge in the fourth quarter, reflecting its expectations for weaker performance. In addition to industry-related challenges, HCR ManorCare is currently under investigation by the Department of Justice, a quagmire that's costing the company $1 million per month in defense costs.

HCR ManorCare has been a problem for HCP in the past, with the REIT having once already cut the rent it charges to the company.

Caution when striking a deal with a PEU.  Like a viper they can turn on you.

As for Carlyle being a great operator one need only look at LifeCare Hospitals and ManorCare.  Carlyle destroyed LifeCare's equity to the point of bankruptcy and ManorCare might be defunct without the REIT deal which nearly eliminated HCR Manorcare's debt in 2010.

ManorCare could be at risk if Carlyle bled the company via dividend recaps.  That information won't be known until ManorCare goes public or bankrupt.  We'll see which comes first.

Recall this is the model proposed to save healthcare.  Surely it will put an end to us all.

Rubenstein Missed Davos 2016: Why?

Carlyle Group co-founder David Rubenstein was not on the attendance list of the recent World Economic Forum meeting in Davos, Switzerland.  The global elite gather annually in the Alps to strategize on how to maintain their hegemonic power and grow their massive fortunes.   

Quartz reported Rubenstein as a no show, among a group of mostly former CEOs.:

David M. Rubenstein, the co-founder and co-CEO of publicly traded private equity firm The Carlyle Group, is another no-show. But Carlyle executive Volkert Doeksen is expected to attend.

Private equity has been front and center at the annual WEF meeting for decades.  For 2016 Blackstone's Stephen Schwarzman served on a panel focused on "Future Proofing Financial Markets."

Private equity underwriters love Davos for two reasons.  It's where deals get done and it can serve as a place for recruiting new investors.  Apparently Rubenstein didn't need the World Economic Forum to sell new investment opportunities.

Bloomberg reported in late December 2015:

KKR & Co. founder Henry Kravis, Blackstone Group LP Chairman Stephen Schwarzman and Carlyle Group co-founder David Rubenstein were among the guests when Kazakhstan President Nursultan Nazarbayev hosted a dinner in New York.

Apart from the dining at the Four Seasons Hotel, there was access to a possible $93 billion on the table as Nazarbayev, who presides over Central Asia’s biggest energy exporter, seeks to boost returns on the country’s wealth funds. The $64 billion National Fund has struggled to achieve an average of 2 percent annually for the past five years.

Washington Business Journal reported in early February 2016:

D.C.-based private equity giant The Carlyle Group (NASDAQ: CG) has raised $2.4 billion to purchase stakes in mid-sized companies.

The Carlyle Equity Opportunity Fund II will focus on equity investments ranging from $20 million to $200 million and serves as a follow-up to a previous fund, 

The new fund has already made investments in marine transportation company Seacor Holdings Inc. (NYSE: CKH), merchandising solutions firm Array Canada Inc. and in the McLean-based legal tech company LDiscovery LLC.

What makes Rubenstein's absence more puzzling was his being in London on January 18-19 for the London School of Economics Alternative Investment Conference focused on hedge funds and private equity.  Rubenstein and fellow PEU David Bonderman of TPG served as keynote speakers for the event.

Last year Mr. Rubenstein was effusive about investing in oil.  Carlyle's deal with Seacor came in November 2015, roughly two months before publicly announcing the new fund:

SEACOR Marine Holdings Inc. ("SMH"), entered into an agreement to issue $175 million in convertible notes to investment funds managed and controlled by The Carlyle Group ("Carlyle"). It is expected that the notes will be issued on December 1, 2015.  

The transaction contemplates the eventual separation of SMH from SEACOR Holdings' other business lines, potentially via a spin-off of SMH or via a spin-off of SEACOR Holdings' other business lines.

Gulf News reported on private equity's moves in the oil shipping space:

Private equity and distressed debt specialist groups — including Blackstone, Carlyle, Centerbridge Partners, KKR, Oaktree Capital Management and WL Ross — have rushed to fill the void, by offering rescue finance, buying up debt at a discount and turning it into equity, or buying new and secondhand vessels. So far, their results have been mixed, hindsight shows that some groups ventured into the sector too early.

Shipping U.S. oil to Europe is one reason Rubenstein might've wanted to attend Davos 2016:  On January 20th Seeking Alpha reported:

The first export of U.S. crude oil in four decades arrived in Europe early today, reaching the French port of Marseille before sunrise after leaving from Texas nearly three weeks ago, Financial Times reports. 

Oil trader Vitol is expected to unload the shipment - a mix of ultralight oil from the Texas Eagle Ford shale formation produced by ConocoPhillips (NYSE:COP) - which will then travel by pipeline to one of two refineries the company operates in Europe under a joint venture with the Carlyle Group (NASDAQ:CG).

January 20th was the opening day for the World Economic Forum.

Was Mr. Rubenstein at Vitol's Swiss Cressier refinery celebrating the first import of U.S oil?  If so he wasn't far away from Davos.

Cressier is one of only two refineries in Switzerland and accounts for approximately 25 percent, by volume, of all refined products sold nationally.

Some may recall Texas landowners sued Carlyle over failure to meet commitments in the Barnett Shale.

Another topic near and dear to Mr. Rubenstein is high on the WEF agenda, Arctic development.   In December 2015 the forum released a report titled:

"Arctic Investment Protocol:  Guidelines for Responsible Investment in the Arctic"

Mrs. Rubenstein, also known as Alice Rogoff, and her husband have spent many years proposing Arctic development.  Both wish to profit from it.

With such compelling topics what could have kept Carlyle consummate salesman away?  Might it be investors fleeing Carlyle's hedge funds, Claren Road and Vermillion Asset Management?   It's not a good time to ask for new money when existing investors can't get their money back.