Sunday, February 26, 2017

Cheers to All American Private Equity!

The press announcement stated:

The increased diversity of PE firms and growing focus of the industry has led the PEGCC to expand its organizational purpose. The PEGCC has been re-named the American Investment Council (AIC), and in its expanded mission, the AIC seeks to “advance access to capital, job creation, retirement security, innovation, and economic growth in the United States by promoting responsible long-term investment.”

“This is a major step forward for our organization as we work to promote private equity and serve as a resource to our member firms,” said AIC President and CEO Mike Sommers. “The American Investment Council represents the full spectrum of private investment and the value it creates for every state in our country. It is more than a new name, it is a renewed commitment to be the voice for private equity in the United States.”

“These changes reflect the broader focus of our member firms post-financial crisis,” said AIC Chairman of the Board and KKR Member Ken Mehlman. “Today, our industry is enhancing retirement security, partnering to grow companies, building critical infrastructure, and providing capital to Main Street without systemic risk.”
Bring out the All American band, preferable those with the courage to continue playing as the unsinkable ship goes under.

Private Equity's Growth Impacted Incomes for 1%

The least readable line in the CBO graph is the one showing the income growth of the top 1% of Americans.  It's the faint blue line showing a rising series of peaks and higher valleys.  The other 99% of Americans are in a darker series of flat lines with a very slight incline.

Can you make out the number at the end of the light blue top 1%  line?  I bolded it in red for those who can't see the richest American's income grew 192%.  

I added the founding dates of top private equity underwriters, the people getting the massive income growth while enacting strategies that held down pay for the other 99%, at least those employed by PEU owned companies.
Private equity underwriters became ubiquitous the last two decades.  Their growth continues:

Private equity multiplied like a virus which eroded incomes in the wider economy.  It also turned America's two party system into one, where political parties Red and Blue love PEU.

Most of the country lives in a financial flood plain where economic shocks can quickly put many underwater.  The top 1% keep getting to higher and higher ground.  They'll be warm and dry when the next crisis of their own making comes around.

Update 3-3-17:   Wealth grew for those at the top starting in 2000 while employment conditions in the U.S. remain bleak.

Update 3-4-17:  The great wealth transfer to members of the Government-Corporate Monstrosity continues unabated.

Update 3-14-17:  Wages for ordinary workers aren't growing.

Update 4-2-17:  These trends occurred under 16 years of Blue Team White House (Clinton and Obama) and 20 years of Red Team Presidents (Reagan, Bush 1 and Bush 2).  Both Political Houses aligned their parties with the PEU class.

Update 4-15-17:   Carlyle's Sandra Horbach described how our world became PEU.

Friday, February 24, 2017

Eric Hold-no-one-accountable to Uber Rescue

Bloomberg reported:

Uber Technologies Inc. appointed former U.S. Attorney General Eric Holder to lead an independent review into claims of sexual harassment by a former software engineer.
That's the same Eric Holder who said he wouldn't pursue fraud that led up to the financial crisis.  In the Uber case Holder said he would leave “no stone unturned.” 

Let's hope he's in the right field of rocks this time.  

Thursday, February 23, 2017

Carlyle Sees Distress Ahead

Breakingviews reported:

The Carlyle Group said on Feb. 23 it raised $2.5 billion for its latest distressed and special-situations fund, Carlyle Strategic Partners IV. The fund is more than triple the size of the alternative asset manager's previous such offering, a $700 million fund that closed in 2011. 
Carlyle's super sized distressed asset fund is timely according to one private equity underwriter (PEU):

"The current global economic and market environment is laying the groundwork for solid distressed control and turnaround investment opportunities," Ian Jackson, managing director and co-head of Carlyle Strategic Partners, said in a statement. 
Carlyle knows because it has at least one distressed affiliate, Philadelphia Energy Solutions (PES).   Moody's downgraded PES debt in November.  Sponsor "debt for dividend" moves can be threatening to a company's financial health.

Despite the downturn, Carlyle Group and its partner, Sunoco parent Energy Transfer Partners, have done well. The partnership banked hundreds of millions from the refinery in dividend-style payouts that were funded in part from a loan that continues to weigh on the company, Reuters reported last month.

In total, between 2013 and 2015 payouts and tax advances to the partnership reached $480.9 million, all but guaranteeing Carlyle's venture would be profitable.
Carlyle's PES has a $550 million term loan due April 2018.  That's over a year away.  I wonder if Carlyle Strategic Partners IV will buy discounted PES debt.  Can Carlyle backdoor Carlyle (like it did to Brintons and Mrs. Fields)?

Monday, February 20, 2017

PEUs Trump Little People

Citizens taken apart by stagnant wages and declining benefits the last few decades provided the ecosystem for Donald Trump's White House win.  Many voters don't know the President appointed billionaires to his cabinet, most are private equity underwriters (PEU) or worked on Wall Street. They've worked a system stacked in their favor (low borrowing costs, preferred taxation) to greatly increase their wealth while middle class workers took it on the chin.
Trump advisor Stephen Schwarzman is co-founder of PEU giant Blackstone Group.  His 70th birthday soiree spectacularly eclipsed his 60th, which was opined to be the harbinger for the end of excess wealth and its shameless display.  Despite this the good times continued rolling for the greed and leverage boys.

President Trump may tap Cerberus Capital co-founder Stephen Feinberg to retool America's Intelligence services.  Cerberus played a role in the "slow motion terrorism of pirate capitalism" which devastated Lancaster, Ohio (Bloomberg).

WaPo described Feinberg:

On Wall Street, Feinberg is considered an enigma. He rarely gives interviews and once said of private equity executives, “We try to hide religiously.”

“If anyone at Cerberus has his picture in the paper and a picture of his apartment, we will do more than fire that person,” Feinberg told shareholders in 2007, according to Rolling Stone magazine. “We will kill him. The jail sentence will be worth it.”
Surely someone from Homeland Security guarded Cerberus' investor gathering and its high ranking officials former Vice President Dan Quayle and Treasury Chief John Snow.  What happened to "see something, say something." 

Why do billionaire private equity chiefs hide religiously to the point of threatening physical harm?  It's their love of money and their endless drive to have more.  How will voters wishes stack up to those of President Trump's close advisors?  I expect the little people will continue getting the raw end of the deal. 

Update 3-14-17:  The Atlantic picked up on how PEUs devastated Lancaster.

Saturday, February 18, 2017

Cerberus' Steward Buying Eight CHS Hospitals

Debt bloated Community Health Systems announced the planned sale of eight hospitals in three states to private equity owned Steward Health, an affiliate of Cerberus Capital Management.

Community's announcement offered

Wayne T. Smith, chairman and chief executive officer of Community Health Systems, Inc., said, “This transaction is a significant step in our strategic work to optimize our portfolio and operations for the future. These hospitals play an important role in their communities and can benefit from Steward Health Care’s community-based care model going forward.” 
Steward's press release stated:

“We look forward to bringing our integrated care model to communities in Ohio, Pennsylvania, and Florida,” said Ralph de la Torre, MD, Chairman and CEO of Steward Health Care.
Health care officials in Ohio, Pennsylvania and Florida will have an opportunity to ask questions about the deal.   Steward's integrated care model in Massachusetts had the system selling its hospital facilities to a REIT for $1.2 billion and leasing them back.  This deal returned Cerberus' initial investment in Steward and more.  Cerberus made more money off Steward by charging annual management fees, deal fees and likely bled the hospital system via dividends/special distributions.

State health officials should ask about the potential impact of Steward enacting these same strategies on the eight CHS hospitals.  KKR's ownership of hospital giant HCA added $15 billion in health care costs from additional interest expense and dividends alone.

Neither party has shared the price or how Steward/Cerberus plans to structure/finance the deal.  CHS will need to share information with Wall Street analysts and shareholders so I expect a number will be revealed.

There are few economies of scale in having hospitals spread out over four states.  However, Steward will hire more overseers for their growing healthcare plantation:

De la Torre said he didn’t expect there to be layoffs as a result of the acquisition, though the health system will be hiring more people in both Massachusetts and each state to help oversee the operations.
Fifty eight percent of CHS employees approved of CEO Wayne Smith.  They may be disappointed to learn only eighteen percent of Steward employees approve of CEO Ralph de la Torre.

That's a 40% reduction in leadership respect.  CHS employees will learn how their new boss earned this level of disdain.

Update 3-7-24:  Now that the PEU boys have stripped Steward Health of vital resources, it's carcass has a recovery plan.  The state of Massachusetts has had enough of Steward's mismanagement. 

Update 3-8-24:  Axios did a story on Cerberus and Steward.  It accuses Cerberus of acting naively.  Haahaahaahaaa!  Once again the smartest guys in the room go stupid...

Thursday, February 16, 2017

Carlyle Chiefs Big Payday

MarketWatch reported:

The founders of private-equity firm Carlyle Group LP collected nearly $212 million in dividends and other compensation in 2016, a 28% drop from a year earlier.

David Rubenstein collected $73.1 million, while his co-founders, William Conway and Daniel D'Aniello, each earned $69.3 million in 2016, according to a regulatory filing.

Dividends from Mr. Rubenstein's stake in the firm accounted for $72.8 million of his annual earnings. He received a $275,000 salary and a $6,625 company contribution for a 401(k) program.
The story failed to report private jet payments to Carlyle's founders.  Carlyle's 10-k states:

Firm Use of Our Founders’ Private Aircraft

In the normal course of business, our personnel have made use of aircraft owned by entities controlled by Messrs. Conway, D’Aniello and Rubenstein. Messrs. Conway, D’Aniello and Rubenstein paid for their purchases of the aircraft and bear all operating, personnel and maintenance costs associated with their operation for personal use. Payment by us for the business use of these aircraft by Messrs. Conway, D’Aniello and Rubenstein and other of our personnel is made at market rates, which during 2016 totaled $16,695 for Mr. Conway, $170,850 for Mr. D’Aniello, and $398,530 for Mr. Rubenstein. We also made payments for services and supplies relating to business use flight operations to managers of the airplanes of Messrs. D’Aniello, Conway and Rubenstein, which during 2016 aggregated $667,781 in the case of Mr. Conway’s airplane, $1,004,292 in the case of Mr. D’Aniello’s airplane and $2,795,585 in the case of Mr. Rubenstein’s airplane. Certain of these services were performed by one of our former portfolio companies, Landmark Aviation. Consistent with the terms of our agreement with Landmark Aviation, in 2016, we received payments from and made payments to Landmark Aviation to adjust the estimated annual costs of operating the aircraft related to 2015 flight operations. In 2016, we received payment from Landmark in the amount of $116,568 related to Mr. D’Aniello’s aircraft, and made payment to Landmark in the amounts of $68,850 and $111,063 related to Mr. Rubenstein’s and Mr. Conway’s aircraft, respectively.
Sweet, given the kind of year Carlyle had.  

Carlyle Group reported assets under management of $157.6 billion as of Dec. 31, down 7% from three months earlier and down 14% from a year earlier.
I wonder how investors in Carlyle's losing hedge funds feel about the big payday for Carlyle Chiefs.   

Carlyle's Service King for Sale Again

Bloomberg reported:

The private equity owners of auto repair-center operator Service King Paint & Body LLC are considering a sale of the company, people with knowledge of the matter said.

Service King’s owners, Blackstone Group LP and Carlyle Group LP, have had discussions with bankers about starting a sale process this year, said the people, who asked not to be identified because they weren’t authorized to speak publicly. The company could fetch more than $2 billion, the people said.
Carlyle invested in Service King in 2012 when the company had a mere 49 Texas locations.  Blackstone bought into the company in 2014 but Bloomberg couldn't find the purchase price.

Moody's reported when it first rated Service King:

The new ratings are in conjunction with Service King's agreement to sell a roughly 55% stake in itself to affiliates of Blackstone.
WSJ reported:

Blackstone Group LP has agreed to buy a majority stake in auto-repair shop chain Service King Collision Repair Centers from Carlyle Group LP with a view to fund the company's future growth, according to people familiar with the matter. The deal values Service King at about $650 million, one of the people said.
By the time Blackstone bought in Service King had 180 locations in 20 states. Carlyle and Blackstone loaded Service King with $695 million in debt according to Moody's:

The Ba3 ratings assigned to the proposed $100 million secured revolver, $355 million senior secured term loan, and $40 million senior secured delayed draw term loan reflect their senior position in the capital structure, as well as the cushion provided by the proposed $200 million senior unsecured notes, which are rated Caa1.
That ballooned to $1.1 billion as of August 2016.  At those debt levels Service King had 299 locations in 23 states.  Time will tell if Bloomberg's article stirs up buyout interest in Service King.

Monday, February 13, 2017

Blackstone's Schwarzman's 70th Birthday Extravaganza

The pre-party anticipation in South Florida included:
What promises to be the exceeding lavish 70th birthday party of billionaire Stephen A. Schwarzman the following weekend.

Schwarzman, the CEO and co-founder of the top private-equity Blackstone Group, is worth $11.6 billion and was recently appointed to head Trump’s Strategic and Policy Forum, comprised of other titans of industry who’ve made outsourcing American jobs a point of pride.

So it’ll likely be a powerful crowd who come to sing the septuagenarian Happy Birthday
And it was a private equity filled event according to Bloomberg:

Representing President Trump’s sphere were daughter Ivanka and son-in-law Jared Kushner and incoming cabinet members Steve Mnuchin, Wilbur Ross and Elaine Chao. Bank bosses included Jes Staley of Barclays and Michael Corbat of Citigroup. Investing titans Henry Kravis, David Rubenstein and Howard Marks paid respects.
Thrive Capital, Dune Capital Management, Invesco, KKR, The Carlyle Group and Oaktree Capital were all represented at the Blackstone celebration.

Flash back a decade:

"We know Trump and Melania attended Schwarzman’s uber luxurious 60th birthday bash in New York ten years ago that was called “the beginning of the end of Wall Street’s gilded age.
That's the longest beginning of the end as the 70th remained uber luxurious:

There were camels in the sand, a gondolier in the pool and a giant birthday cake in the shape of a Chinese temple -- with Gwen Stefani on hand to help sing Happy Birthday at midnight.
One private equity underwriter (PEU) reveled in the event:
“The world is an uncertain place, a lot of people are unhappy with a lot of other people, there are a lot of things that people are upset about,” said Oaktree Capital’s Marks. “So it’s nice to have an evening where everybody’s happy, harmonious and upbeat.”
Life in PEU land.

Sunday, February 12, 2017

After Twelve Years AIG's Greenberg Settles for 18 Cents on the Dollar

AIG's Maurice "Hank" Greenberg settled with the New York Attorney General for $9 million for "inaccurately portraying A.I.G.’s financial results over four years."  Neither Greenberg not Smith admitted to fraud.  The New York AG sought over $50 million from prior bonuses with accrued interest.   That means Greenberg settled for 18 cents on the dollar.

Greenberg is the latest AIG executive to pay back executive incentive compensation.  Former CEO Franklin Raines settled for $24.7 million in April 2008 for his role in a six year accounting fraud

Tom Donilon and Jamie Gorelick got to keep their fraud driven executive pay despite burying the whistle blower report from Nye Lavalle.

Hank Greenberg paid a relatively small price for his "accounting inaccuracies."   Five months after Franklin Raines settled, also without admitting guilt, Lehman Brothers failed.  Lehman failed in part due to AIG shenanigans.  What might happen five months after Hank Greenberg's settlement?  Time will tell.

Update 2-13-17:  WallStreetonParade took a different angle on Hank Greenberg's settlement.

Saturday, February 11, 2017

Documentary Defends de Groote and PEUs like Carlyle

PRNewsChannel promoted an upcoming documentary screening:

PRESUMED GUILTY is an award-winning documentary that exposes new allegations of Swiss prosecutorial misconduct in the case connected with Belgian Jacques de Groote, 89, a former high ranking representative of the International Monetary Fund (IMF) and World Bank.

The case known as “MUS affaire” involves not only Swiss prosecutors, IMF, World Bank representatives and globally recognized politicians (i.e. former U.S. President George H.W. Bush), but also global business structures like the Carlyle Group. The story involves capitalization of unique historical opportunities brought by economic transition in Central Europe after the fall of Communism in the 90s and billion dollar fines Swiss authorities imposed on Central European entrepreneurs.
One screening will occur in Las Vegas:

On February 15, Oscar Goodman, legendary Las Vegas mayor and and criminal defense attorney, will host a screening of PRESUMED GUILTY at the Mob and Law Enforcement Museum.
Attending and co-hosting is political journalist and activist Chuck Muth of Citizens Outreach and Muth’s Truths. The event begins at 5pm for a very private screening hosted by Mayor Goodman.
Following the event will be cocktails hosted by Mayor Goodman and Chuck Muth at Oscar’s Beef Booze & Broads–Mayor Goodman’s restaurant.

Democratic Oscar Goodman united with Republican Chuck Muth in defending the big money globalist gang in Las Vegas.  When he's not threatening journalists with his baseball bat Goodman may want to defend big money boys taking liberties with the law.

Eric Toussant wrote in December 2013:

Jacques de Groote, the former Executive Director to the IMF (1973-1994) and World Bank (1975-1991) for Belgium, was condemned in October 2013 by Swiss courts in an affair concerning the fraudulent privatisation of the principal coal mine in the Czech Republic.
His co-defendants, five Czech businessmen, were given fines and prison sentences ranging from 36 to 52 months. The five Czechs were found guilty of aggravated money laundering and fraud or complicity of fraud. These verdicts punish them for the misappropriation of assets of the Czech mining company MUS (Mosteck Uhelna Spolecnost) from 1997 to 2003.
So how does The Carlyle Group's good name get associated with the case? It turns out Steven Norris, a Carlyle co-founder left the private equity underwriter (PEU) in 1995.  WaPo reported in January 1995:

Steven Norris is starting a limited partnership called Appian Equity Partners Ltd., to be based in the Netherland Antilles. It will invest the funds of a tight circle of investors -- at this point, Norris said, they include a European bank, some U.S. pension funds and a couple of wealthy Saudi families.

Norris will remain as a senior adviser to Carlyle and will continue to enjoy the reportedly healthy financial return from his holdings in Carlyle business partnerships.
The documentary trailer said de Groote "worked for" Appian Group, which had President George H. W. Bush and Lawrence Eagleberger on its board of advisors.   It did not note that Appian halted fundraising in March 1999.

The Appian Group, a firm formed by Stephen Norris-the co-founder of The Carlyle Group-has aborted fund raising for its $500 million buyout fund and will wait until it either has found an anchor sponsor or has added new partners.
That speaks to a crisis in the PEU world as fundraising is the lifeblood.  What happened that investors did not feel comfortable funding Appian's next move?

FT reported in 2004:

Appian Group has come from nowhere to become one of the largest and most powerful financial groups on the Czech business scene.

Since 1998 it has acquired Mostecka Uhelna (MUS), the second largest brown coal mine, and Skoda Holding, once the country's biggest engineering group. Appian is also negotiating to buy Severoceske Doly, the largest brown coal mine.

Yet Appian's origins and ownership remain unclear, while its takeover methods and lobbying power have provoked controversy.

Its rise and the rise of others like it in the region - such as PPF in the Czech Republic and, in Slovakia, Penta Group, J&T Group, and Istrokapital - show how secretive private financial groups have become significant players, regularly outmanoeuvring foreign investors.

"These groups exist everywhere but the trouble here is that they are very influential and very closely linked to decision makers," says the head of a local brokerage.
That's a critical part of the PEU model, cozying up to decision makers. 
Speculation over Appian's origins has focused on the group's acquisition of MUS from the government in a hostile takeover in 1998.

Appian said it funded the acquisition from a US-registered parent but - according to copies of documents seen by the Financial Times - this US company later split acrimoniously, with one side claiming that it had merely licensed the use of its name to the Czech operation.

The true source of the funding, the state privatisation agency alleged at the time, was that the mine's management had used its environmental reserve fund secretly to buy up floating shares and seize majority control from the state.
These events could've scared away investors in early 1999.
Appian says the fund has €1bn at its disposal but it has so far not revealed where this money comes from, declaring merely that it has international investors.

MUS provided Appian with a stable cash flow and gave it the ear of the incoming Social Democrats, for whom the depressed north Bohemian coal basin is a stronghold.

Appian quickly won a reputation as a good employer, an active charity sponsor, as well as a competent manager.

When the Social Democrats privatised the almost insolvent Skoda engineering group last year, Appian was the government's favoured choice.
Note the Social Democrat political connection and how it benefited Appian.  Oddly a storied Wall Street firm reacted to this political pressure.

J P Morgan, the government's adviser, came under heavy political pressure to grant Appian exclusivity without a tender and it eventually resigned.

"We got uncomfortable with the overall situation," explains Johannes Kinsky, head of JP Morgan's Prague office.

"In any case it would have been hard for us to advise the government to sell to a company that refused to reveal the source of its funds."
Now that private equity is ubiquitous I wonder if J.P. Morgan would make the same decision.
Appian finally snapped up Skoda for Kc800m, with the state writing off Kc3.8bn of state-held debt.
That's one major public subsidy, another PEU hallmark.  Yet another is paying fines for illegal or potentially illegal behavior.  

All parties in the MUS Affair served jail time except Appian Group's President Jacques de Groote.  Radio Praha reported in 2013:

The five former managers of MUS received prison sentences ranging from just over a year to more than four years. The 86-year-old de Groote was the only one to escape prison and received a fine.
The obvious Carlyle connection is Appian's start from a Carlyle Group co-founder.  That hardly seems enough for Carlyle to allow their good name to be associated with this documentary.

Might Presumed Guilty actually help Carlyle facing a $1 billion Guernsey lawsuit financed by a former Carlyle Capital Corporation investor?   What if the documentary discredits the man who brought the story to Swiss investigators?  

1998  The fraudulent privatisation of the MUS mine in the Czech Republic begins.

1998-1999  J. de Groote becomes the President of the Appian Group, a Swiss company based in Fribourg, specialising in investments in the companies being privatised in Central and Eastern Europe, particularly in the Czech Republic.

2000  A $500,000 dollar loan from Alain Aboudarham to Jacques de Groote turns bad, and their relationship becomes hostile.

2002  Alain Aboudarham puts pressure on Jacques de Groote and his Czech partners to get back his money, but is unsuccessful.

December 2004  Alain Aboudarham writes a letter to the Swiss courts to “reveal the affair.”

June 2005  Alain Aboudarham is summoned before the Swiss courts to explain in detail his denunciation. Immediately afterwards, the Swiss attorney general’s office (MPC) opens an investigation.

2004 to 2006  In the United States, different courts judge the dispute between Alain Aboudarham and Jacques de Groote.
Carlyle prevailed in U.S. courts regarding investor losses from Carlyle Capital Corporation (CCC).

The collapse of the Carlyle fund was swift and substantial. Within just eight months of the July 2007 offering, the company had defaulted on over $16.6 billion of its indebtedness and had been forced into liquidation.
It took bankruptcy trustees in Guernsey to get the case heard.  Last year Carlyle got their insurors back on the hook for the Guernsey claim, should bankruptcy trustees win.  Now if they can discredit the vengeful investor funding the CCC lawsuit:

A major Dutch investor lost $60 million when a Carlyle Group LP fund collapsed in March 2008. Now, he is paying for others to sue the U.S. private-equity firm, a high-stakes gamble that could make him hundreds of millions of dollars.
The investor is Louis Reijtenbagh, a 70-year-old former family doctor who became one of the Netherlands’s richest men by investing in art, distressed debt and other assets.
And now Reijtenbagh has invested in the bankruptcy trustee suit over permanently distressed debt.

If Presumed Guilty can rescue Appian Group President Jacques de Groote by calling the lawsuit a witch hunt that could rub off on Carlyle's CCC lawsuit.  Will Presumed Guilty: Part Deux tell the CCC story from Carlyle's perspective?

Wednesday, February 8, 2017

Carlyle AUM Hits Four Year Low

The Carlyle Group's fourth quarter and 2016 annual report revealed:

Total Assets Under Management: $157.6 billion as of Q4 2016 (-14% in 2016

◦ Major drivers of change versus Q3 2016: Distributions (-$8.8 billion), divestments of Claren Road and ESG (-$4.7 billion), foreign exchange impact (-$3.3 billion) and net redemptions (-$0.7 billion), partially offset by market appreciation (+$4.5 billion) and commitments, net of expired capital (+$1.8 billion). 

◦ Total Dry Powder of $50.1 billion as of Q4 2016, comprised of $17.5 billion in Corporate Private Equity, $11.6 billion in Real Assets, $6.8 billion in Global Market Strategies and $14.3 billion in Investment Solutions.
In Q1 2012 Carlyle had $159.2 billion in AUM.  The high for the period was Q2 2014 at $202.7 billion.

A few highlights from today's earnings call include:

David Rubenstein:  Fortunately, we are operating at a very favorable environment for the alternatives industry and for Carlyle. For our fund investors, asset prices and significant levels of distributions have increased demand to allocate even more capital to leading alternative asset managers. We are certainly poised to benefit from this environment and the risk of a near-term recession seems to have dissipated.
Bill Conway:  2017 is shaping up to be a year of transition as we complete the investments cycle for several major funds, eventually move these funds and others into carry and raise the next generation of funds.
Curt Buser:  Total hedge fund AUM at the end of the third quarter was $5.2 billion and was zero at year-end, resulting in a decrease in assets under management.  Fee earning assets under management is expected to grow again in 2018 after raising new capital and activating the related fees.
Bill Conway:  We need to make progress towards our goal of raising approximately $100 billion from 2016 to 2019. We raised about $14 billion in 2016 without many of the biggest funds in the market and we have a lot of work in front of us.

David Rubenstein:  On the fund raising, I would add just that there are two large groups that I may have mentioned before, are really dramatically increasing their amount of money that they are putting into private equity and not on other alternatives. There are the sovereign wealth funds which are dramatically growing in size and they are coming in in very large amounts in to our funds and other funds, our peers, and also high net worth individuals through feeder funds or through family offices directly. And we can see an explosion of interest from those two groups.
Curt Buser:  Fund raising costs will increase in 2017 given the larger amount of capital that we expect to raise and this will put pressure on fee related earnings in 2017 relative to 2016, since as you know, we generally expense all fund raising cost upon raising new capital. 
A different earnings call by Lowes CEO James Tisch raised concerns about Carlyle's big plans:

The merger market is being driven by large pools of private and corporate buyers, the wave of private capital combined with the abundance of available leverage at remarkably low rates has enabled private equity firms to pay big prices for companies that haven’t already been gobbled up by strategic buyers.

In my opinion, the markets are priced for perfection, and they have been that way for quite some time, complacency reign supreme. However, my experience has shown me that this state of affairs won’t go on indefinitely.
The Carlyle call included the state of affairs for Vermillion Asset Management, one of the "closed" hedge funds.

David Rubenstein:  We took a $100 million non-cash reserve last quarter related to these losses which principally revolve around the misappropriation by third parties of oil owned by various Vermillion investment vehicles. We are actively pursuing remedies to recover some or all of these losses but the amount and timing of recovery is uncertain. In the fourth quarter, we repurchased investor interest in one of the Vermillion vehicles, thereby resolving potential claims and acquiring rights to be reimbursed from future recoveries.
I'm sure Carlyle Capital Corporation (CCC) investors will be intrigued by by Rubenstein's comment that Carlyle repurchased investor interest to avoid a lawsuit.  The CCC investor suit in Guernsey should be closer to a ruling or settlement.  Oddly, the suit was financed by a Dutch billionaire who'd invested in CCC.  How will the battle of the billionaires turn out?

Tuesday, February 7, 2017

Carlyle to Garner Golden Goose

A Carlyle Group press release announced the purchase of Golden Goose Deluxe Brand, an Italian luxury lifestyle  fashion company.  No financial terms were disclosed

Golden Goose Deluxe Brand develops total look collections for both men and women and caters to the needs of quality-conscious sophisticated customers in search of a lifestyle brand that offers distinctiveness and differentiation from the mainstream global luxury brands.
Which explains the unique description of current ownership on Carlyle's website

Today the company is controlled by Ergon Capital Partners III S.A. and participated by Zignago Holding S.p.A., the company’s founders and the Management tea.
Chai.  Ciao.  We'll see if debt bloating, management fees and dividend bleeding kill Golden Goose.

Update 3-8-17:  Carlyle closed on Golden Goose yesterday.

Update 9-21-19:  Carlyle may flip GGDB for $1.1 billion, a massive increase from the purported $400 million deal that got Carlyle its Golden Goose.

Sunday, February 5, 2017

Carlyle, Hellman to CRO over PPD Sale?

Reuters reported:

Laboratory Corporation of America Holdings (LabCorp) is in talks to acquire contract researcher Pharmaceutical Product Development LLC (PPD) for more than $8 billion, including debt, people familiar with the matter said on Friday.
Based in Wilmington, North Carolina, PPD offers its services to biotech, pharmaceutical and medical device companies that want to outsource research services. It focuses its research on a wide range of therapeutic areas, ranging from cardiovascular to urology.

The Carlyle Group and Hellman & Friedman took the company private in 2011 for $3.9 billion.
Since then Carlyle launched $4 billion in debt that included a $400 million dividend.  PPD had no debt when Carlyle and company bought the company in 2011.  Moody's assessed after the 2015 PEU dividend recap.

PPD's B2 CFR rating reflects the company's very high financial leverage and aggressive financial policies, including a significant amount of shareholder dividends paid since the company's leveraged buyout. The proposed dividend will increase adjusted debt/EBITDA to around 7.5x for the twelve months ended March 30, 2015, up from 6.7x. The ratings also reflect risks inherent in the CRO industry, which is highly competitive, has high reliance on the pharmaceutical industry, and is subject to cancellation risk. 
Carlyle was not done with its bleeding of PPD   It took on another $200 million in debt for an acquisition that surely generated deal feels. 

Moody's reported in October 2016:

The company will be increasing the size of its existing term loan by $460 million. The proceeds of the incremental term loan, along with cash on hand, will be used to fund a $525 million dividend.  The equity sponsors (Carlyle and Hellman)  will have taken out more in dividends than the original equity invested.
That does not included deal or management fees, other ways sponsors profit from affiliates.  I'll venture Carlyle and its PEU brethren have stuck PPD for $2 billion. 

It will be interesting to see if Labcorp wins and what information they provide about PPD in their SEC filings. 

Saturday, February 4, 2017

Carlyle's Rubenstein and Conway Promote Artificial Intelligence reported

A large quantity of the Asset TV interviews conducted at the 2017 Davos World Economic Forum directly addressed both the threat and opportunity that automation brings.

David Rubenstein, co-founder and co-CEO of The Carlyle Group believes that automation is “coming down the pipeline and that if we’re not prepared we’re going to be run over.”
Carlyle ran over the pension benefit for employees of UK carpet maker Brintons.  Now their jobs could be victims of the next PEU money saving move.

Carlyle owns UK roadside assistance company RAC, whose pension the PEU also dumped.  It's not clear if they will have to respond to their jobs being run over.

Waxing philosophical Carlyle co-founder Bill Conway said in a Carlyle podcast:

"Take AI (artificial intelligence).  Why couldn't they develop AI that could do Bill Conway's job, even better than he can do it?  Could it free us?  Could it be a freeing kind of thing, innovation, technology?  It can so improve the human condition I think frankly in ways that we don't imagine.  I don't even know what they will be. Maybe life expectancy."
AI could be freeing for billionaires, but not for people who've lost their retirement funding and face the specter of job loss.

Life expectancy dropped for the first time since 1993:

For the average man, his life expectancy has fallen from 76.5 years to 76.3 years. For women, their life span is also on the decline – going from 81.3 years to 81.2 years.
Drilling down deeper into the data reveals something disturbing:

Suicides also increased significantly, although they do not account for a large absolute share of deaths. Researchers often include both unintentional injuries and suicides as related outcomes for people suffering mental illness and homelessness.
How many people have been cast aside by private equity's focus on greed the last twenty fives as PEUs became ubiquitous?

That's the train PEUReport stepped in front of in 2007 and a big time financial reporter spoke out against in 2011.

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.

President Trump's administration is chock full of private equity underwriters so this trend will not reverse soon.   The PEU train believes in AI and it may run over lots of jobs before encircles the globe.

Update 11-11-19:  Google's healthcare partnership has access to millions of health records and plans to use artificial intelligence to "identify diseases and make predictions aimed at improving outcomes and reducing cost."  How about we reduce costs by not spending a penny on healthcare AI?  I don't want an algorithm deciding what treatment I need or can't get.  The public has seen the driver-less car not recognize a jaywalker and Goldman's Apple credit card employ a sexist algorithm without even know the cardholder's gender.  The Boeing 737 Max shows MCAS system programming can be deadly on a mass scale. 

Update 8-12-22:  In many cases AI fails to meet the scientific method as "results" are not reproducible, i.e. have no predictive value.   They can do worse and cause harm.

Wednesday, February 1, 2017

NBTY's $4 Billion Supplement for Carlyle Group

The Carlyle Group is ready to exit vitamin and supplement maker NBTY after six years of ownershipReuters reported Carlyle could make $4 billion from Nature's Bounty, $1.2 billion from dividends and $2.8 billion in profits from the sale of the company.

Carlyle's purchase of NBTY saddled it with $2.2 billion in debt.  Nature's Bounty debt ballooned to $3.2 billion after Carlyle deployed it's PEU debt for dividend scheme.

Reuters referred to deal as an LBO in the title of the article.  Private equity replaced LBO after Junk Bond King Michael Milken went to jail.  Apparently both the man and his greedy methods are rehabbed and proud to be spoken as our society walks back in time.  Oddly the 1989 NYT piece quotes America's newest President:

Nevertheless, many Wall Street professionals criticized the deal Drexel had with Mr. Milken. Once his salary began to exceed the budgets of many small countries, the firm should have altered the terms of the deal, they said.  

Executives have also begun to voice concern about what the payments say about the firm's management. ''You can be happy on a lot less money,'' said Donald J. Trump, the New York developer, whose net worth is estimated at $1 billion. ''I'm amazed that the firm would allow someone to benefit that greatly.''
Junk bonds sell at double digit interest rates  The junkier the debt the higher the interest rate.

In early January The reported:

Private equity firm Carlyle Group LP has hired investment bank Goldman Sachs Group Inc to help it explore the sale of one of the largest U.S. herbal supplement makers, Nature's Bounty Co. (NBTY)
It's an aside but Carlyle employs the son of Goldman Sachs CEO Lloyd Blankfein.  The "greed and leverage boy" world deals with big dollars but it's a relatively small family of billionaires.

The 1989 story concluded with:

"The financial world is characterized by explosions of wealth and then, for those involved, a very sad day of reckoning. This has only lifted the process of financial aberration to new heights.''
The sad day of reckoning nears yet again, which is why Carlyle is selling anything in sight.