Carlyle Triumverate Has God's Favor

Private Equity News reported:

“Private-equity firms seem to be favored by God because the founders don’t seem to die early,” Mr. Rubenstein said.

"God's work" Lloyd Blankfein's son Alex works for The Carlyle Group.

Politicians of both stripes favor private equity underwriters.  How much richer can Carlyle's PEU founders get with both God and elected officials on their side?  It remains to be seen.

Carlyle Founders Elevated Out of Operations for 2018

Carlyle Group co-founders David Rubenstein, William Conway and Daniel D'Aniello took a step back from running their politically connected private equity underwriting (PEU) firm.  The DBDs, David-Bill-Daniel, started The Carlyle Group in 1987.

For all its glasnost, the genius of Carlyle may well yet rest with the unsettled dynamic among its leaders that has been there from the Marriott breakfast. 

“At the end of the day,” Akerson said, “it wouldn’t be the firm anywhere close to where it is if they were alone. It’s a complicated, synergistic relationship.”

And it's mostly done, as all three step back from their current roles starting January 1, 2018.   Axios reported:

Sources say that Rubenstein is planning to launch a family office, likely in partnership with at least one of his daughters.

That could be in competition with Carlyle for deals.  The PEU guard is changing.

Update 10-28-17:  Carlyle PEU Nolan Harte turned out for the Build Our Future PAC which supports conservative millennials running for office.   Surely, conservative millennials love PEU.

Carlyle to Bid on Old Mutual Global Investors

FT reported:

US private equity group Carlyle has joined the heated takeover battle for Old Mutual Global Investors’ £25bn fund business, with four parties now bidding for the investment arm run by star UK manager Richard Buxton. Carlyle joins Challenger and Macquarie Investment Management, two Australian financial services groups, and TA Associates, a buyout specialist.

Assets under management fell by nearly £2 billion in the last year (from £26.9 billion in Q2 2016).  Like Carlyle OMGI knows how to proposition investors.  Both know how to move money offshore. 

Old Mutual said in September it would reorganize several divisions:

Old Mutual Global Investors will focus on its highly successful single strategy portfolio range and will continue to grow this attractive franchise under the leadership of Richard Buxton as CEO. Old Mutual Wealth is assessing, together with OMGI management, internal and external structures for the single strategy business to continue to develop it further.

Apparently, private equity underwriter (PEU) is the preferred structure for OMGI.   Old Mutual Global Investors, established in 2012, is a mere five years old.  To think it could soon have a new sponsor. 

Goldman Sachs is advising parent Old Mutual on selling its asset management offspring.  Which PEU will win OMGI?

Carlyligarchy

The Guardian ran a piece on oligarchy.  It illuminated how a small number of greedy, power seekers can distort a democracy in their favor.  The story used ancient Greece but their practices brought to mind The Carlyle Group, a politically connected private equity underwriter (PEU).

At its core, oligarchy involves concentrating economic power and using it for political purposes. Democracy is vulnerable to oligarchy because democrats focus so much on guaranteeing political equality that they overlook the indirect threat that emerges from economic inequality.

Flashback to October 2001 in a piece titled "the Ex- Presidents' Club":

But what sets The Carlyle Group apart is the way it has exploited its political contacts. When Carlucci arrived there in 1989, he brought with him a phalanx of former subordinates from the CIA and the Pentagon, and an awareness of the scale of business a company like Carlyle could do in the corridors and steak-houses of Washington. In a decade and a half, the firm has been able to realise a 34% rate of return on its investments, and now claims to be the largest private equity firm in the world.

Carlyle managed $5 billion in assets in early 2001.  It manages over $170 billion today, a thirty four fold increase..

The next characteristic also brought Carlyle to mind:

They build a legal system that is skewed to work in their favor, so that their illegal behavior rarely gets punished. 

Carlyle settled a New York pay to play investigation for $20 million.

And they sustain all of this through a campaign finance and lobbying system that gives them undue influence over policy.

Private equity's preferred carried interest taxation is a perfect indicator of this undue influence. There has been no public will for billionaires to pay a lesser tax rate than a secretary, but that's been the case for over a decade.

On June 8, 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 ’80s. After a few minutes, Shapiro recalls, Rubenstein returned and said, “That was a senator. That one call just saved us on carried interest.”

Oligarchs remain in power by maximizing their public image.

"Instead of public works projects, dedicated in the name of the people, they relied on what we can think of as philanthropy to sustain their power. Oligarchs would fund the creation of a new building or the beautification of a public space. The result: the people would appreciate elite spending on those projects and the upper class would get their names memorialized for all time. After all, who could be against oligarchs who show such generosity?"

And that's exactly what Carlyle co-founder David Rubenstein did.  Alaskan journalist Craig Medred reported on one Rubenstein relationship, that with his wife Alice Rogoff Rubenstein:

Some friends and former friends of Rogoff are angry at Rubenstein, who they believe could have cleaned up his long-estranged wife’s Alaska mess but refused to do so. Rubenstein is worth an estimated $2.5 billion. He spent $21.3 million to buy the Magna Carta in 2007.

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

Mrs. Rubenstein's revelation fits with Greek oligarchic practices.

"the key to oligarchy is that a set of elites have enough material resources to spend on securing their status and interests. He calls this “wealth defense,” and divides it into two categories. “Property defense” involves protecting existing property – in the old days, this meant building castles and walls, today it involves the rule of law. “Income defense” is about protecting earnings; these days, that means advocating for low taxes"

President Trump's cabinet is chock full of PEUs.  They are in a unique position to protect their brethren.

The question is whether democracy will emerge from oligarchic breakdown – or whether the oligarchs will just strengthen their grasp on the levers of government.

The Federal Reserve board already has two board members from The Carlyle Group.  One is Vice Chair for Regulatory Affairs and other could be the next Fed President.  Carlyle co-founders dined regularly with Presidents from both the Red and Blue Team.  They have free access to Capital Hill and show up when their pocketbook dictates.

Former Vice President Joe Biden's recent defense of rich people suggest the billionaire grasp on government will strengthen with each crisis.  Politicians Red and Blue love PEU.

Carlyle PEUwear to Become Hip on Capital Hill?

Highsnobiety reported:

Just two days following the announcement that Supreme had sold a 50 percent stake in its company to The Carlyle Group, some branded tees have cropped up online. Available in the firm’s corporate colorway of white and blue, each tee is $30 and features the nondescript company logo on the front.

Step right up.  This is an opportunity for politicians to show their Carlyle love for a mere $30.

Update 11-25-18:   Netflix comedy show takes on Supreme and The Carlyle Group.

Fed Chair Candidate & Vice Chair for Supervision Worked for Carlyle

Federal Reserve Vice Chair for Supervision Randall Quarles worked for The Carlyle Group overseeing the PEU's financial/banking investments.  The new Fed Chair may have Carlyle on his resume.  Carlyle could have two alumni at the top of the Federal Reserve Bank Board of Governors.  What might that unleash for the greed and leverage boys?  Politicians Red and Blue love PEU.

Update 10-21-17:  A Carlyle alum as Fed Chair remains a distinct possibility.

Retail Rush for Carlyle: History Suggests Otherwise

The Australian reported:

A growing number of retail investors are joining superannuation funds, sovereign wealth funds and high net worths in moving money into private equity funds, as the sector looks to deploy record levels of capital, according to one of the world’s top private equity executives. 

Carlyle courted retail investors before with little success.

In May 2015 Carlyle closed Carlyle Global Core Allocation Fund, a mutual fund with $50 million in net assets.   The fund had a mandate to invest across equities, debt, real estate, commodities and currencies using exchange-traded funds.  It also ceased Carlyle Enhanced Commodity Real Return Fund, which had a mandate to invest in assets like energy and metals. (source: Reuters)

Carlyle's hedge fund clients took a bath across many offerings.  Carlyle closed most of those offerings in 2016.

Carlyle Capital Corporation retail investors lost big in March 2008 when Carlyle put CCC into bankruptcy.  FT's headline read "Carlyle fails to save $22bn CCC fund."  A more accurate title would've been Carlyle drowns CCC in debt. 

Carlyle co-founder David Rubenstein called for a PEU retail investor boom that hasn't materialized over the last four years.  Given how many Americans have been taken apart by the greed and leverage boys I am not sure it ever will.

Carlyle Invests in Skate Culture

New York downtown cool has a new sponsor, the Carlyle Group, a politically connected private equity underwriter (PEU). Business of Fashion reported:

The deal marks the first time a top-tier private equity firm has invested in streetwear and underscores the power of the Supreme brand — often dubbed “the Chanel of streetwear” — and its innovative business model, rooted in cool but accessibly-priced product.

Carlyle's investment will fuel rapid expansion.  How long before Supreme opens a store in Washington, D.C.?   When will we see the DBDs wearing skater-inflected cool?

Update 10-10-17:  Highsnobiety ran a scattershot piece on Carlyle-Supreme.   It mentioned Carlyle's ownership of Synagro but not the bribery case involving the wife of Rep. John Conyers or Synagro's bankruptcy.  It drew an analogy to Carlyle's investment in Beats.

Update 10-28-17:  Hip, high prices and scarcity are the Supreme shopping experience.

Update 11-25-18:   Netflix comedy show takes on Supreme and The Carlyle Group.

Update 10-24-19:  PEU Supreme landed in San Francisco.  “Why can’t the tech-heads come check us out? Why can’t the artists come check us out?”

Making Tax Reform Work for PEUs

House Speaker Paul Ryan visited Pennsylvania Machine Works to push tax reform.  The stated objective is to lower middle class taxes and corporate tax rates.  The framework proposes cutting the corporate tax rate from 35 percent to 20 percent  under the guise of growing American jobs.

Ryan ducked the carried interest taxation issue.  On Face the Nation he deferred it to the committee that will write the tax bill.  Carried interest taxation enables private equity underwriters (PEU) to pay a preferred, lower tax rate. 

Bloomberg list Penn Machine as a private company.   There is no evidence the company is private equity owned.

Foundry reported in May 2017 the sale of another Pennsylvania manufacturer similar to the plant Speaker Ryan visited:

Speyside Equity Fund I LP, a New York-based private-equity group, acquired Ashland Foundry and Machine Works Inc., a specialty steel foundry in eastern Pennsylvania. The foundry specializes in pump component and assemblies, for chemicals, mining, water, and industrial markets. The seller was Michael Bargani, an investor who also is listed as the owner of several other metalcasting businesses. The value of the purchase was not announced.. 

Speyside Equity is also the owner of Alcast Corp., Dalton Corp., Pacific Steel Castings, and Sawbrook Steel Castings. It has a range of other holdings in manufacturing, fabricating, specialty chemicals, and food ingredients businesses.

Owner Bargani purchased the plant in 2009 before flipping it to PEU Speyside Equity earlier this year.  Speyside's website states:

Speyside Equity is an operationally focused private equity firm that has been successfully investing in manufacturing-related businesses since 2005. 

A cut in corporate tax rates will increase corporate profits and enable PEU owners to siphon off more cash.  There's one major problem.  The PEU model is to load companies with debt which increase interest expense.  Interest is tax deductible, as are deal/management fees.  That means formerly tax paying corporations often don't owe taxes under PEU sponsorship.

Carried interest is the gift that enables billionaires to profit more when their PEU flips an affiliate.  It survived two runs in the last decade, thanks in part to Carlyle Group co-founder David Rubenstein and a complicit Congress.  Carlyle's 10-k (filed in May 2017) states:

We earn management fees pursuant to contractual arrangements with the investment funds that we manage and fees for transaction advisory and oversight services provided to portfolio companies of these funds. We also typically receive a performance fee from an investment fund, which may be either an incentive fee or a special residual allocation of income, which we refer to as a carried interest.

Carlyle achieved a net income of over $400 million in 2015.  It made a provision of $2.1 million for income taxes.  That's a tax rate of 0.52%.

President Trump, like President Obama before him, ran on eliminating the carried interest loophole.  Trump's team is waffling on his commitment.  President Obama made $400,000 from speaking to The Carlyle Group annual investor meeting.  Carlyle's founders have made hay off preferred carried interest taxation.

I expect Trump's tax reform will benefit the PEU boys, many of whom serve in his Cabinet.  The question is in how many ways?  Paul Ryan and Congress are expected to deliver yet again.