S&P Pushes Back Against PEU Unitholder Structure

While lenders kowtow to private equity underwriters (PEU) with low to no covenant debt one organization pushed back ever so slightly.  Barron's reported:

Most alternative managers have a dual-class or similar structure at the public entity level that confers limited or constrained voting rights on public holders, and S&P recently stated that they would no longer add companies with dual-class structures to their indices. This decreases the likelihood that alternative managers would be added to market-cap-weighted indexes such as the S&P 500.

The article added:

Alternative asset management firms such as Blackstone Group (BX), Carlyle Group (CG), and KKR (KKR) might consider converting to a C corporation status, which could make it easier for investors to own them.  

That might happen after founders cash in their billion dollar personal stakes.  PEU founding fathers won't give up control.  Amierica's dual class is exemplified in the world of finance. 

Carlyle Group LPs Treated to Yet Another U.S. President

President Obama continues to follow predecessor Bill Clinton's footsteps.  He spoke at the annual Carlyle Group Investor Meeting, the one reserved for limited partners (not lowly unitholders).  Obama's fee was nearly double Bill Clinton's.  The Carlyle talk was one of three that will make Obama over $1 million.

Obama ran as a populist then served the people he promised to hold accountable. He ran as a peace maker then made war after optional war. He said Hillary would continue his legacy and that's what scared many.

Ex-President Obama’s obscene speaking fees are from Wall Street and private equity underwriter LP events. This is what made the Blue Team like the Reds and turned many voters away from Hillary Clinton, who also spoke at Carlyle Group events.

Obama explained away his absurd payments by saying he will give $2 million to children's charities.  The logic is "it's OK to make the king's riches as long as the king is benevolent."  Carlyle Group co-founder David Rubenstein doles out his billions to historical charitable causes. Is Obama trying to imitate the most visible of his three Carlyle DBD hosts?

Obama would be wise to consider the perspective of Mrs. Rubenstein, with whom he dined during an Alaska visit as President.  An Alaska insider reported:

Rubenstein is worth an estimated $2.5 billion. He spent $21.3 million to buy the Magna Carta in 2007.   “He told reporters he was just a ‘temporary custodian’ of the historic piece of parchment. 

In 2016, Rubenstein gave the National Park Service $18.5 million to help restore the Lincoln Memorial.  In private, Alice Rogoff Rubenstein has described those acts as publicity grabs and claimed all her financier husband really cares about is making money. 

Crony capitalist birds of a feather flock together, especially at the Carlyle Group Annual Gathering of Limited Partners.  After 9-11 one of the first nonmilitary plane to hit U.S. airspace held attendees from Carlyle's investor meeting.  In 2014 Carlyle found it important to track LPs and their movements.

How might Brand Obama help a cash engorged Carlyle Group profit?  Obama made history, the PEU kind.  

Update 7-11-21:   Politicians Red and Blue love PEU, as does Tucker Carlson and many members of the media.

Pharma Patent Transfer to Native Tribes Latest Legal Scam

 NYT reported:

The drugmaker Allergan announced Friday that it had transferred its patents on a best-selling eye drug to the Saint Regis Mohawk Tribe in upstate New York — an unusual gambit to protect the drug from a patent dispute.

Under the deal, which involves the dry-eye drug Restasis, Allergan will pay the tribe $13.75 million. In exchange, the tribe will claim sovereign immunity as grounds to dismiss a patent challenge through a unit of the United States Patent and Trademark Office. The tribe will lease the patents back to Allergan, and will receive $15 million in annual royalties as long as the patents remain valid.

Allergan announced the deal in a press release.  This hearkens back to a time when corporations worked with Alaskan Natives to avoid taxes.  It became known as the Great Eskimo Tax Scam.

The Great Eskimo Tax Scam grew out of a brief, curious tax loophole that permitted Alaskan companies owned by Eskimos to sell their losses for hard cash to other American corporations. By offsetting the Eskimo losses against their gains, American corporations were able to avoid income taxes. All of a sudden there was a business in matching up profitable American corporations with Eskimos. (Carlyle Group co-founder David) Rubenstein and Norris spotted the window of opportunity and leapt through.

Since no one likes to pay taxes, finding the corporate buyers was easy. The trick was to flush out the loss-making Eskimos. Through a friend in Washington, Rubenstein plugged himself into a group in northern Alaska that had discovered a dubious technique for showing tax losses on idle property. (The Internal Revenue Service now challenges the validity of the Eskimos' accounting.) To persuade the Eskimos to deal with him, Rubenstein flew them to Washington and put them up in a fancy hotel on the condition that they listen to his pitch. In less than a year Rubenstein and Norris shuffled between $1 billion and $2 billion dollars of dubious Eskimo losses into profitable American companies, for which they took a 1 percent fee, or between $10 million and $20 million. "I wouldn't be surprised if they made more on that than they've made on everything else since," says a Carlyle associate. According to Rubenstein, "It gave me and some of the others here the confidence that we could compete in the investment world." Still, he only acknowledges his debt to the business of tax avoidance after the subject has been raised. 

It took Congress several years to close the Eskimo loophole.   How long will it take to close the sovereign immunity loophole for patent protection?  The dodge enables drugs to stay on patent, i.e. remain more expensive and hold off cheaper generic versions.

It's been ten years since Congress first attempted to eliminate preferred carried interest taxation for private equity underwriters, like Carlyle.  Congress hasn't done it despite overwhelming public support for billionaires to pay the same tax rate as their secretary.

Congress serves their funders.  Rarely do they serve the people.  I expect the Tribal Patent Protection Scam will live for quite a time.

Update 9-22-17:   The tribe filed for dismissal of the patent lawsuit. 

Toys "R" Us: A PEU Return?

Bloomberg reported:

Some suppliers to Toys “R” Us Inc. have scaled back shipments to the retailer as it struggles to refinance debt and avoid a potential bankruptcy filing, according to people with knowledge of the matter.

The vendors are balking as Toys “R” Us continues talks with lenders over a new loan that would allow the company to stay open while it works out a recovery plan through bankruptcy proceedings, said the people, who asked not to be identified because discussions are private. The loan is being marketed by Lazard Ltd. to banks and existing creditors, said one of the people. 

Bain Capital owns Toys "R" Us alongside fellow private equity underwriter (PEU) KKR:

Toys “R” Us has vexed private equity owners Bain Capital, KKR & Co. and Vornado Realty Trust, which loaded the retailer with debt in a $7.5 billion buyout more than a decade ago. 

As doubts about the company’s health mounted, the cost for debtholders to insure against a default by Toys “R” Us surged in the past week to levels that imply a more than 60 percent chance it won’t meet its obligations in the next year. Credit-default swaps expiring in June were trading at 36 percentage points upfront, or $3.6 million for every $10 million of debt insured, according to data provider CMA. That’s up from $300,000 per $10 million at the start of the month.

Toys "R" Us bonds fell to 43 cents on the dollar on Friday.  CDS coverage rose to $4.6 million for every $10 million of debt insured.

Bain, KKR and Vornado won't throw good money after bad.  They are shopping for "a DIP loan to fund operations under chapter 11."  Will Toys "R" Us owners have gotten their money's worth from the company before they return it to debtholders?

Update 9-18-17:  Implosion is imminent.  Bloomberg reported "Credit default swaps expiring in December traded at more than 75 points upfront Monday. That means it would cost about $7.5 million to insure $10 million of Toys “R” Us debt.  Its 7.375 percent notes due 2018 traded for as little as 18 cents during Monday’s session."

Update 9-19-17:  Bain, KKR and Vornado returned Toys "R" Us to bondholders with its bankruptcy filing in Richmond, Virginia.  It's the second largest retail bankruptcy filing ever.

Update 6-3-18:  The PEU boys reneged on employee severance pay mostly because they don't care about the little people.  Cash goes to sponsor via dividend bleeding.  None is left for the hardworking people who've spent a career.  Employees reached out to Blue Team corporacrats Robert Menendez and Cory Booker for help.  That pair may toss Toys R Us employees an anchor.

Update 7-2-19:  CBS News reported Toys R Us "workers are getting $2 million, a fraction of the $56 million in fees awarded to Kirkland & Ellis, the law firm representing Toys R Us, the decision is still a victory of sorts. That's because pensions and severance payments are labeled as unsecured debt when a company files Chapter 11, making them low priority and less likely to be paid.  A bankruptcy judge on Thursday approved the settlement to a class-action lawsuit filed on behalf of 33,000 former Toys R Us workers, a figure that means each will receive about $60."  

Update 1-19-22:  Bloomberg reported Toys 'R Us directors and owners may face the music for self serving decisions as the company imploded:

Creditors claim in ongoing litigation that seven company directors have now said they knew they shouldn’t have approved executive bonuses and onerous bankruptcy loans at the outset of the case that put the retailer on the fast track to a sudden liquidation six months later.

Owners and directors who signed off on the ill-fated financing received immediate bonuses of as much as $2.8 million as part of the plan,

Vitamin World Files for Bankruptcy Post Carlyle

Former Carlyle affiliate Vitamin World declared bankruptcy according to CTPost

In a filing with the U.S. Bankruptcy Court for the District of Delaware, Holbrook, N.Y.-based Vitamin World blamed underperforming stores, above-market rents and unspecified disruptions in its base of suppliers.

Centre Lane Partner bought Vitamin World in February 2016 from Carlyle Group affiliate NBTY, also known as Nature's Bounty.   At the time of the sale the Carlyle team stated:

"With the shift of NBTY's focus in our US business to investing in and building our core brands, this sale of Vitamin World to Centre Lane Partners will ensure Vitamin World has the right investment and focus on its future as a stand-alone retail business." 

Centre Lane paid $25 million for Vitamin World

Vitamin World lists as its largest unsecured creditor The Nature’s Bounty Co., owed $21.5 million.

It's not clear how much of the amount owed is from the sale or from store inventory.  The bankruptcy filing shows the $21.5 million owed is debt from the sale plus trade.  The current obligation is 86% of the $25 million purchase price.  

In the Petition, Vitamin World reports $50 million to $100 million in assets and $10 million to $50 million in liabilities.  This statement does not fit with the filing document which shows a $125 million unsecured claim by 10th Lane Partners, LLC.  10th Lane is part of Centre Lane Partners.  Quinn Morgan heads both Centre Lane and 10th Lane.

Reuters reported last week the likelihood of a bankruptcy as a way to get out of leases on unprofitable stores.

I'll bet Vitamin World meets its $125 million financial commitment to its owners, Centre Lane and 10th Lane.

Update 9-13-17:  Store closures and renegotiating lower rent is the aim of the filing.

Petraeus' "Biggest Gig Yet" is Peanuts for PEU Partner

Who knew being a board member of an affiliate beat out being partner of the owning private equity underwriter (PEU)?  That's the line KKR's David Petraeus wants the public to believe.  Reuters reported:

Former United States CIA Director David Petraeus said Thursday he has joined the board of a large cybersecurity company controlled by investment firm Kohlberg Kravis Roberts (KKR & Co. LP), taking his most prominent role in the private sector. 

That statement is blather.  KKR has nearly $150 billion in assets under management.

Petraeus, a KKR partner and head of its global risk assessment, said in an exclusive interview that he was joining Optiv Security because of the increasing importance of hacking threats. 

The private equity group KKR bought a dominant stake in Optiv this February. The company has about $2 billion in annual revenue and more than 1,000 employees.

News reports suggest KKR paid $1.8 to $1.9 billion for Optiv.  They bought the company to grow its government cybersecurity business:

wanting to expand Optiv’s commercial customer base beyond the 67 percent of the Fortune 500 that it currently serves and deeper into the government, where former general Petraeus pledged to help with his understanding of intelligence and military needs.  

KKR isn't the first PEU with such a vision.  The Carlyle Group invested in Coalfire in September 2016, doing so alongside The Chertoff Group.  Months later Coalfire acquired The Veris Group to:

become a major cybersecurity and threat assessment consultancy to federal agencies, businesses and cloud-computing service providers looking to do business with the federal government.

I find it interest private equity underwriters are happy to take government money but they become very concerned when their patriotic duty of paying taxes is raised.  Uncle Sam is to provide incremental revenue so PEUs can profit but that's all.  Billionaire PEUs retained preferred carried interest taxation for the last decade.  

Optiv's press release stated:

Now, with Gen. Petraeus as an advisor, we can step up our efforts and do even more for our country.

More for our country?  KKR could do more for our country by having founders Henry Kravis and George Roberts forego their preferred carried interest taxation.    That's not likely to happen.

Trump has hosted a steady stream of private equity executives since the election. Carlyle Group LP co-CEO David Rubenstein, Blackstone’s real estate head Jon Gray, KKR’s Henry Kravis and Cerberus Capital Management’s Steve Feinberg have been among his visitors.

Politicians Red and Blue love PEU, which is why carried interest lives on.

Decade Long Canard: Taxing PEU Carried Interest as Income

Republicans and Democrats threatened for the last decade to tax private equity billionaires at the same rate as their secretaries.  The American public, long finding this practice abhorrent, stood ready for elected officials to eliminate this enrichment loophole.  Serious debate occurred in 2007 and 2010.  Candidates Barack Obama and Donald Trump promised they would address this inequity.  Obama didn't and the Trump administration is walking back its commitment.

There's something odd in this debate.  Private equity underwriters (PEU) more than doubled assets under management (AUM) over the last decade from just over $1 trillion in 2006 to nearly $2.5 trillion in mid 2016.  Despite an 115% growth in PEU AUM projected proceeds from changing the law fell 42%.  It dropped from $26 billion in 2006 to a current projection of $15 billion.  What?

This faulty math fits with Carlyle co-founder David Rubenstein's longstanding discount of changing tax law.   Flashback to Congress' last serious attempt in this arena when Rubenstein lobbied hard to retain private equity's preferred taxation.  The NewYorker reported:

On June 8th, (2010) Rubenstein’s cell phone rang as he was speaking to supporters of the Economic Club, at the Phillips Collection. He left the stage to take the call. Among those in the audience was Gary Shapiro, the consumer-electronics lobbyist who was Rubenstein’s travel companion to Japan in the eighties. After a few minutes, Shapiro recalls, Rubenstein returned and said, “That was a senator. That one call just saved us on carried interest.”

And it was a bipartisan save.  A major financial reporter wrote:

I watched a video interview of 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!

Fifteen billion, that sounds like serious money even for Carlyle.  Washington Business Journal reported:

Private equity juggernaut The Carlyle Group (NASDAQ: CG) is looking to bust through the record for the biggest domestic buyout fund ever — and it's aiming for $15 billion, according to Bloomberg News.

If the D.C.-based firm is successful, it would be the biggest domestic buyout fund — larger funds have been raised for overseas buyouts — topping the $13.9 billion KKK & Co. fund raised in March.

Obviously, Mr. Rubenstein has different definitions for serious money.  His record on not wanting to pay taxes is long and clear.  He has spoken them to many politicians, most of whom call back.  In Washington D.C. money talks louder than the will of the people.

Carlyle Wins CCC Lawsuit Brought by Liquidators

Bloomberg reported a Guernsey Court ruled in favor of The Carlyle Group in a $1 billion lawsuit seeking damages for the Washington, D.C. based private equity underwriter (PEU).  The suit "alleged that the partnership and fund’s board of directors were negligent, grossly negligent or had willfully mismanaged the pool and breached certain fiduciary duties." The court did not buy that argument for Carlyle's operation of Carlyle Capital Corporation:

Carlyle Capital was a leveraged mortgage-bond fund formed in 2006 at the height of the real estate bubble. The pool met its demise in March 2008 when its mortgage-backed collateral plummeted and the fund defaulted on $16.6 billion in debt. 

Bloomberg did not state how highly Carlyle leveraged the fund (32x) or that the fund went public on Euronext in July 2007.    It also failed to note Guernsey's status as a tax haven.  Having a court side with losing investors or bankruptcy liquidators against a global tax dodger could harm new incorporations.  That would not do.

So the next time Carlyle comes calling with a highly leveraged fund based on bubble inflated assets know you don't stand a chance of getting your money back should it implode and Carlyle management will be held to no standard.

If you hear a sales pitch like this:

“superior risk- adjusted returns from investments in a diversified portfolio of fixed income investments” that “expects to pay investors 90 per cent of its net income, have net returns of 14.1 per cent and a projected net dividend yield of 12.5 per cent”

Beware.   The last group of suckers lost it all.

PEU Carried Interest Thank You Letter

Dear Congress,

This Labor Day weekend we would like to thank you for not eliminating the "billionaire tax break" for the last ten years.  The public dislikes our paying taxes at a far cheaper rate than many citizens.  Sensational news reports have used secretaries and gardeners in their examples.

The first run at eliminating our preferred carried interest taxation came in 2007.  You kindly entertained Carlyle Group co-founder David Rubenstein, Blackstone's Stephen Schwarzman, KKR's Henry Kravis and  David Bonderman of TPG.  You received the message sent by twenty lobbying firms for which we spent $4.9 million.  Our case was and is:

Private 
Equity
Capital 
Knowldege is
Executed 
Responsibly

The next serious run at eliminating the loophole came in 2010.  Indiana Senator Evan Bayh went from protecting the billionaire tax to working for Leon Black's Apollo Global.  The public didn't know that many of you would retire from public service only to work for us.

Estimates for eliminating private equity's preferred taxation ranged from $25 to $27 billion over ten years.  Thanks to your inaction that money stayed in our pockets.  We put it to good use by giving our secretaries and gardeners an average wage increase of 1-2% per year over the period, raises that failed to keep up with inflation..

We appreciate your letting us buy a reprieve in 2007 that continues today.  Given the number of private equity underwriters (PEU) in President Trump's cabinet we trust you and the White House still have our backs.  In gratitude,

The PEU Boys (Summer 2017)