Monday, April 18, 2016

Great Rewards Await Obama for His Secrecy

RollingStone reported on President Obama's hoarding key financial documents from government sponsored enterprises like Fannie Mae and Freddie Mac.  The article stated:

In the pre-crash years, however, the firms' leaders acted less like the stewards of utilities and more like sleazy Wall Street hotshots. They made hyper-aggressive business decisions because their bonuses were tied to earnings growth. Some executives even engaged in Enronesque accounting manipulations in an effort to jack up their bonuses even further. These efforts led to record civil fines.
Former Obama Chief of Staff  and Investment Banker Rahm Emanuel served on Freddie Mac's Board of Directors during the pre-crash years.  Obama's National Security Advisor Tom Donilon was Fannie Mae's top lawyer and senior executive for years of fraudulent accounting.
The Obama administration turned Fannie and Freddie into cash cows with Treasury as their PEU sponsor:
Among other things, they demonstrate that not only did the government know the GSEs weren't in a "death spiral," it was actually quite confident in their future profitability well before it changed the bailout terms. Then and now, government officials lied about what they were doing, and why.
It will be interesting to see the names behind the bailout change strategy.  Given their past history with Fannie and Freddie will Donilon or Emanuel's name surface?

Saturday, April 16, 2016

Claren Road Kill

Wealth Management Report wrote:

Claren Road Asset Management, which is majority-owned by Carlyle Group, suffered the second biggest drop in size, with assets down by nearly $4 billion to $1.23 billion in January 2016. The credit-oriented fund, which had been popular with pension funds, had posted poor returns for more than a year, prompting many investors to exit.
That's a precipitous fall, down from a high of $8.5 billion in September 2014.  WSJ reported mid decline:

In July an influential investment consultant advised its clients to pull their money from the firm, and in August Carlyle disclosed that clients had requested nearly $2 billion back in the third quarter—roughly half the money the firm then managed.   
That's a PEU run.  I don't expect these losses to impact Carlyle's outstanding investment track record of 30% annual returns.

Thursday, April 14, 2016

Carlyle Technologies in Panama Papers

While searching for any Carlyle ties to Mossack Fonseca I found an odd piece in VanguardiaMX:  I used Google translate for the article which was published in Spanish:

In early versions of the information published in national media, Proceso magazine to head , described very generally the relationship of the company Altos Hornos de Mexico ( AHMSA ) with the signing Mossack Fonseca via the company Carlyle Technologies Corporation for " triangulation resources of the Mexican company since 2006, when the steel was bankrupt . "
I found the Proceso piece which translated to

The operation was made ​​through Carlyle Technologies Corp. , a company created in Panama through the office Mossack Fonseca , specializing in the operation in tax havens. AHMSA is so far one of the most important consortia of Mexico that appears in #PanamaPapers , global journalistic investigation that involved the magazine Proceso . 
Apparently Carlyle Technologies funded a $2.6 million luxury oceanfront condo for three executives with AHMSA.

There is no evidence that Carlyle Technologies is an affiliate of The Carlyle Group.  It's not on Carlyle's recent list of subsidiaries filed with the SEC.  However, there is an affiliate known as Carlyle Mexico Partners.

In 2007 Carlyle announced:

Global private equity firm The Carlyle Group today announced that it has raised $134 million for its first fund dedicated to investments in Mexico. Carlyle Mexico Partners (Carlyle Mexico), which is already 29 percent invested, makes control investments in companies primarily in Carlyle’s seven areas of sector expertise. CMP’s five dedicated investment professionals are based in Mexico City. Carlyle Mexico is headed by Managing Director Joaquin Avila. Mr. Avila established Carlyle Mexico Partners in January 2004 and has served as Co-head of the team since that time until becoming Head of the fund in December 2006. Mr. Miguel Valenzuela and Mr. Rodrigo Fonseca have also been part of the team of investment professionals since the group’s inception.
I found it interesting Carlyle had a Fonseca under their employ at Carlyle Mexico Partners.  The International Finance Corp invested $20 million in Carlyle Mexico in 2005  The Carlyle Group was founded on tax avoidance.  It would be interesting to know how Carlyle Mexico fulfilled that prime objective and any role Mossack Fonseca played in making the greed and leverage boys richer.

A 2015 story in Strictly Motor Yachts cited The Carlyle Group's purchase of Lauderdale Marine.  Further down it mentioned one player in Panama Papers story,

It was also recently reported that Dutch yacht builder Moonen Shipyards needed to put two builds on hold due to the financial troubles of one of its major shareholders. Altos Hornos de Mexico, one of that country’s largest steel plants was financing two yacht projects by Moonen, a 36 meter Martinique and 30 meter Matica, both in the builder’s Caribbean series. Altos attributed pulling its funding to the severe drop in steel prices in Mexico, which fell almost 40% in recent months.
AMSHA executives won't have new yachts to go with their oceanfront villa.

Update 5-23-16:  Fox News found a different Carlyle tie to the Panama Papers.

Tuesday, April 12, 2016

Oxfam, IFC & Carlyle's Two Subsidiaries in Mauritius

Reuters reported:

The World Bank's investments in sub-Saharan Africa came under attack on Monday by global charity Oxfam which said the vast majority of loans made by the bank's private lending unit in the region went to companies using tax havens.
The charity said 84 percent of the bank's International Finance Corporation's (IFC) investments in the region in 2015 went to companies whose use of tax havens had no apparent link to their core business and with a low level of transparency.

I searched the Oxfam report for company names.  None were listed.  I'd hoped to see if any IFC investments went to private equity affiliates.

The Carlyle Group has a sub-Saharan African fund, which received a $50 million investment from the African Development Bank in 2012.  Carlyle has two subsidiaries in Mauritius, the African tax haven cited in Oxfam's report. 

The OxFam report had this to say about Mauritius:

Mauritius is the most preferred offshore destination for IFC clients

In 2015, 40 percent of total projects included companies with a subsidiary or headquarters in Mauritius. This is either clients themselves or indirectly through sponsors, technical partners or others involved in the project and thereby indirectly benefitting from the investment. But this small island is widely recognized for facilitating ‘round-tripping’ investment, which allows companies and individuals to take their money offshore, shroud it in financial secrecy, and then bring it back into the country disguised as FDI. This allows them to reap the reward of tax benefits only available to foreign investment; the money is subject to tax breaks rather than capital gains and income tax that should rightly be charged on domestic investment. As an example, 34 percent of total investment to India from 2000 to 2015 has come from the small island of Mauritius, most of it from the same building in Port Louis, the capital.

It's the PEU way, facilitated by the greed/leverage boys and their political sponsors.

Note:  IFC invested in Carlyle Mexico in 2007 and hosted a private equity meeting focused on emerging markets in 2006 where Carlyle co-founder David Rubenstein gave the opening address.

Sunday, April 10, 2016

Death of Former Carlyle Group Beltway Bandit CEO

Washington Business Journal reported:

Earle Williams, the late longtime president and CEO of what was once known as BDM International, wasn't just a leader in the government services industry. He was one of its creators.

On March 25, Williams died in Springfield at the age 86 of pneumonia and myelodysplasia, The Washington Post reported.
In many ways, the story of Williams and the company he presided over for 20 years was the story of government contracting — the "Beltway bandits," as the companies came to be known.
Williams moved BDM's headquarters from El Paso to Virginia in 1973 to position the company for defense contracts.  

In an industry constantly in flux with dealmaking, BDM was one of those companies that saw itself caught in the crossfires of consolidation. In 1988, the aerospace and defense arm of Ford Motor Co. bought BDM for $425 million. Ford Aerospace was then sold to Loral Corp. in 1990, who in turn divested BDM as a part of that deal and sold it to Washington private equity firm Carlyle Group for $130 million.

The Carlyle Group held BDM until December 1997, when it was sold to TRW Inc. for $942 million
Carlyle's co-founders chose Washington, D.C. for their private equity firm for much the same reason as Mr. Williams.  WaPo reported on Carlyle's buying BDM in 1990.  Their piece said Williams was critical in steering BDM towards The Carlyle Group.

A 1993 New Republic piece suggested Williams did more than steer.

The CEO of BDM, a close friend of Carlucci's named Earle Williams, threatened to walk out with his top management unless his owner sold him.
Private equity utilizes leverage to enhance its investment returns.

Carlyle said it agreed to pay $115 million of the $130 million acquisition price in cash and the rest in debt and warrants.

Of the $115 million in cash, a Carlyle source said, nearly $80 million would be borrowed and the balance would come from the company's own reserves and its institutional investor partners, such as the Mellon family and the Equitable Life Assurance Society.
The Carlyle Group was only three years old at the time.  Somehow WaPo's business reporter couldn't see nearly $95 million of BDM's purchase price was borrowed.   

LATimes reported on the 1990 deal:

BDM is a well-known defense think tank that performs policy analysis, computer software services and consulting for defense projects. It had 1989 sales of $342 million and earnings of more than $20 million. It employs 3,100 people.
Bloomberg had this to say about Carlyle and BDM in February 2007:

(Carlyle's) fortunes turned when they wooed former Defense Secretary Carlucci to the firm in 1989. He delivered a sweet deal in his first year--a defense think tank called BDM International that was involved in large projects like manned space stations and, eventually, the deployment of Operation Desert Shield. "All these little jewels were coming available from larger companies that were looking to [pare their holdings to] find their core competencies," recalls D'Aniello. Carlyle was able to sell BDM in 1997 and make its investors 10.5 times their initial stake. The firm went on to become a force in the defense industry: Carlyle was one of the nation's 15 biggest defense contractors from 1998 to 2003, according to the Pentagon.
The Army's Strategic Studies Institute wrote in 1997:

The participants in the mergers, investments, and buyouts are not only defense firms. US financial entities, such as venture capital firms or buyout companies, have also entered the defense industry sector via outright purchases, mergers, and other types of acquisitions of defense contractors. The Carlyle Group made investments in 1991 and 1992 in several large defense contractors, among them BDM International, Vought Aircraft Company, GDE Systems, and Magnavox Electronic Systems. In 1994 and 1995 Carlyle resold Vought and Magnavox to Northrop Grumman with average annual gains on the transactions of 90 and 208 percent respectively.  
Carlyle diversified beyond defense but loves the predictability of Uncle Sam's trillion dollar budgets.   That's why Beltway Bandits help the feds with more than aerospace and defense.  From technology to healthcare Carlyle Group affiliates serve Uncle Sam.

Earle Williams' death provides an opportunity for a walk back in time to when private equity underwriters (PEU) were known as "Access Capitalists."  Carlyle's co-founders no longer need political heavyweights to give them access to halls of power.   Doors open with a phone call. 

Saturday, April 9, 2016

Carlyle Group's Offshore Holdings: 56% of Subsidiaries

The Panama Papers have drawn international attention to the way offshore corporations enable those with great wealth to avoid paying taxes.  The Guardian reported several schemes, which included:

A former chief executive of HSBC Michael Geoghegan was revealed to have held his £8m London townhouse through an offshore company – and planned to avoid tax by effectively renting the property to himself.
The Carlyle Group made transparency the focus of its 2016 Corporate Citizenship report.  In Carlyle's transparency they never once mentioned the word tax or taxes as being part of a corporation's citizenship.  That's telling.

While chock full of information the report did not cite the number of subsidiaries owned or their place of incorporation.

Carlyle has long reported its foreign subsidiaries to the SEC and its latest list revealed:

PEU Report noted Carlyle's virtual nonprofit status and had fun with Carlyle's affiliate list by playing "Count the Caymans!"  I'm glad the world is getting an up close picture of how the connected have enriched one another while jettisoning the rest.

Update 11-10-17:   Billionaire tax dodges finally hit the broader media.

Friday, April 8, 2016

Newt Becomes PEU

Former House Speaker Newt Gingrich is now a private equity underwriter (PEU) with JAM Capital Partners.  JAM needs Newt for the following reasons, according to the WSJ.

The firm said the former House speaker would help with raising a $100 million fund to invest in businesses in the southeastern region of the U.S.

Along with helping raise the new fund, Mr. Gingrich will work with the companies that JAM Capital plans to acquire and assist them with regulatory issues, said Mr. McCallum.
Fundraising and regulatory assistance are euphemisms for mobilizing connections and greasing hurdles.