Wednesday, October 5, 2022

The Peudulum Swings

The Carlyle Group issued a report on the various dangers in the current global economy using themes from Edgar Allan Poe's short story "The Pit and the Pendulum."

The report avoided private equity's contributions to the current maladies of "inadequate and insecure energy supplies, over-engineered supply chains, and globalized production processes that prioritize efficiency at the expense of resilience."

Carlyle sent thousands of U.S automotive part manufacturing jobs to China for efficiencies. 

....the problems we face today, which stem largely from underinvestment in the decade preceding the pandemic.

In the years following the Global Financial Crisis (GFC), companies cut back substantially on investment in working capital, fixed assets, and anything else that needed to be financed or could become “stranded.”

Capacity was increasingly leased rather than purchased, with a proliferation of contract manufacturing arrangements and lengthening global “supply chains” that turned each component, input, or step in the production process into its own contestable market. These strategies not only derisked companies in the event of another GFC, but also substantially boosted return on equity (ROE) as unbundling allowed companies to focus on the highest value-added portions of the production process.

The Carlyle Group took $35 million from the State of Texas for 3,000 jobs at Vought Aircraft Aviation.  At the end of the promise period Carlyle cut 35 jobs, a $1 million incentive per job lost.  Carlyle held onto public money as it starved Vought of working capital.  Vought's CEO Elmer Doty admitted the company was under a liquidity crisis.

The man who wrote the report served as Vice President and Chief Economist for the private equity trade group from 2008-2011.  He became Carlyle's Director of Research and Statistics in 2011. 

One might expect the greed and leverage boys to accept responsibility for their role in bleeding affiliates.  Darkness there and nothing more....

Update 10-6-22:  Carlyle co-founder David Rubenstein's conflict of interest made Bloomberg, where Rubenstein has a podcast.  Declaration Partners is Rubenstein's family office and employs one of his daughters.

Declaration Partners collected $240 million from wealthy individuals and family offices to target multifamily housing and industrial properties across the US, the New York-based company said in a statement.

Rubenstein's grand returns won't make housing or healthcare cheaper for the common person.