Carlyle Group's Three News Stories: Disturbing Pattern Emerges

The media caught on to Carlyle's funneling huge amount of affiliate cash to the PEU parent.  It happened with ManorCare via a sale/leaseback of nursing home facilities and with Philadelphia Energy Solutions (PES) via the classic PEU debt for dividend move.  Both ManorCare and PES declared bankruptcy in 2018.

PES owes millions in unpaid taxes, meaning finance people sent millions from PES to parent Carlyle vs. paying accrued taxes.  Carlyle now owns a CFO consulting firm so it can coach other finance people to act in PEU ways.

For this Carlyle co-founder David Rubenstein gets a Legend in Leadership award from Yale.School of Management.  Rubenstein is a "pioneer of modern private equity," one of the original greed and leverage boys.  His former wife said all Rubenstein cares about is money.  If that's the mark of great leadership something is very wrong with management theory/practice. 

Stephen Schwarzman's PEU Pay

How much of Stephen Schwarzman $786 million came from debt funded dividends paid to sponsor.  The SEC requires companies to report CEO pay multiples so conceivably they could require private equity underwriters to report how much of founder pay comes from loading affiliates with debt.

Blackstone reported its CEO pay multiple:

For 2017, the annual total compensation for Mr. Schwarzman, our principal executive officer, was $125,519,429 and our median employee’s annual total compensation was $218,449. Accordingly, annual total compensation of our principal executive officer was approximately five hundred and seventy-five times the annual total compensation of our median employee. 

Using the $786 million figure Schwarzman's pay is a staggering 3,600 times Blackstone's median pay.  But that's not all.

WSJ reported:

Blackstone Group LP guaranteed Chief Executive Stephen Schwarzman new rewards for his contribution to the firm as a founder when he chooses to retire—and even after his death.

Blackstone's 10-k stated:

Mr. Schwarzman will be provided with specified retirement benefits for the remainder of his life, including that he be permitted to retain his then current office and continue to be provided with administrative support, access to office services and a car and driver. Mr. Schwarzman will also continue to receive health benefits following his retirement until his death, subject to his continuing payment of the related health insurance premiums consistent with current policies. 

Finally, Mr. Schwarzman will also receive reimbursement for travel costs (including travel on personal aircraft) for Blackstone related business functions, annual home and personal security benefits, reasonable access to our Chief Legal Officer, reasonable access to certain events, legal representation for Blackstone related matters, and, subject to his continuing payment of costs and expenses related thereto, he will continue to be provided with offices, technology and support for his family office team at levels consistent with current practice. 

The agreement provides that, following Mr. Schwarzman’s termination of service, he or related entities will remain entitled to receive awards of carried interest at reduced levels until the later of February 14, 2027 or the date of Mr. Schwarzman’s death. The profit sharing percentage for any carried interest awarded in new funds launched after Mr. Schwarzman’s termination of service shall generally be set at 50% of the profit sharing percentage Mr. Schwarzman held in the most recent corresponding predecessor fund prior to his termination of employment or, in the case of new funds without a corresponding predecessor fund prior to Mr. Schwarzman’s termination of service, a profit sharing percentage set at 50% of the median of the aggregate profit sharing percentages held by Mr. Schwarzman at the time of his termination of service. 

While currently Mr. Schwarzman is entitled to invest in or alongside our investment funds without being subject to management fees or carried interest, this has been extended to continue until ten years following the date of Mr. Schwarzman’s death as to Mr. Schwarzman, his estate and related entities. 

Let the good times roll for billionaire PEU founders.

PEU Owned Retail Apocalypse Death List

ZeroHedge listed 23 retailers with plans to close stores and layoff employees.  Ten retailers have private equity sponsors.

In 2014 FT quoted a chief creative officer from a retail company that went through three private equity owners.

“What happens in private equity is they come in and they say we’re going to be a great partner. We want to hold this long term and we’re going to help you nurture and build this brand. [But] the day after signing, they talked about selling the business.”

Private equity underwriters also like to pull cash from affiliates via deal fees, management fees and dividends/distributions.   Payless paid its PEU owners $400 million in debt funded dividends which helped tip the company into bankruptcy.

Dividend recapitalizations transfer vast sums from affiliates to PEU parent.  PEU founders have been enriched by sponsors sucking cash in a non-nurturing move.  Debt bloated balance sheets can tip affiliates into bankruptcy.  When that happens creditors have no recourse to money pushed up to the PEU parent.

Update 3-6-18:  NPR's Marketplace found this pattern of debt funded, management fee cash migration to parent in its piece this afternoon.

Update 3-8-18:  Add Apollo affiliate Claire's to the list of near bankrupt retailers.

Update 3-19-18:  Apollo Global lost Claire's to bankruptcy.

Update 4-20-19:  Wolfstreet noted PEU causation of retail bankruptcies.