Sunday, July 3, 2016

Celebrating PEU Fee-dom this July 4th

This 4th of July elected officials all over the United States are celebrating the freedom of private equity underwriters to profit handsomely from investing public pension funds.  The NYT reported:

It began last year as a promising push by a few states to require private equity firms that invest on behalf of public pension funds and university endowments to be more forthcoming. But the effort has hit a wall as bills in California and Kentucky intended to shed light on fees and practices at these powerful firms have been either killed or watered down.

One of the bills proposed in California would have required only modest disclosures: the publication of a handful of pages from confidential limited partnership agreements. It was shot down.

Even worse, another private equity transparency bill in the state was recently amended to eliminate disclosures about related-party transactions between private equity firms and the portfolio companies they oversee. Fees paid by portfolio companies to private equity funds ultimately come out of the pockets of fund investors, so more sunlight in this area would have been beneficial.
Billionaire PEUs like Carlyle's David Rubenstein, Blackstone's Stephen Schwarzman, Apollo's Leon Black and KKR's Henry Kravis have carte blanche access to America's Red and Blue political ruling class.  Those elected officials preserved private equity's preferred carried interest taxation for over a decade in direct contrast to public opinion that the super wealthy should not pay a lower tax rate than their gardener or limo driver.

Here's another reason why the public and elected officials should care about the business of private equity, which relies on leverage and financial manipulations to garner outsized returns or cause their affiliate to go bust.  Moody's is a credit rating agency and it had this to say about The Carlyle Group's financial practices regarding affiliate Vogue International, which Carlyle is selling to Johnson & Johnson for $3.3 billion.

Moody's Investors Service, ("Moody's") placed the ratings of Vogue International, LLC (Vogue) under review for upgrade, including the company's B2 Corporate Family Rating and B3-PD Probability of Default Rating.

The review for upgrade is based upon Moody's view that, should the acquisition by Johnson & Johnson be consummated, Vogue will become part of an enterprise with a significantly stronger overall credit profile than if Vogue remains a standalone entity. 

Vogue's existing B2 Corporate Family Rating reflects its modest scale, limited operating history at current sales levels, narrow product focus, and high customer concentration. The rating also incorporates Vogue's very aggressive financial policies including large debt-funded shareholder distributions. Revenues and earnings are vulnerable to changing customer preferences and competitor actions. 

Vogue International LLC (Vogue), headquartered in Clearwater, FL, develops, markets, and sells hair care products marketed as having natural ingredients primarily through mass market retailers. The company is 51%/49% owned by founder Todd Christopher and The Carlyle Group. Revenue for the 12 months ended March 31, 2016 was approximately $319 million.  
Aggressive financial policies brought us more than one asset bubble, which later burst badly.  The business and buying and selling companies becomes the public's business when PEUs are investing public funds.

PEU freedom means the greed/leverage boys are above paying regular taxes and making proper disclosures regarding their fees.   Fireworks both please and divert the attention of the masses.