KKR Lands General PEUtraeus

General David Petraeus became a private equity underwriter (PEU) with KKR. WaPo reported PEUtraeus will head up the firm's division concerned with "macroeconomic and geopolitical forces that could influence KKR’s investment decisions.  Those forces are the Government-Corporate Monstrosity, General Dwight D. Eisenhower's Military-Industrial Complex on trillions in federal steroids.  PEUtraeus serves what Eisenhower grew to disdain. 

From book deal to DealBook, how PEUtraeus' fortunes turned.  Might it be time to reintroduce the General at the Bilderberg 2013 meeting, a regular event for a number of KKR leaders?

WaPo Pushes Carlyle's ValueCast

WaPo published an excerpt from The Carlyle Group's recent ValueCast by co-founder David Rubenstein (Carter White House) and Chris Ullman (Clinton White House),   Rubenstein is a PEU Oracle (PEU is my acronym for private equity underwriter).

The ValueCast included a confession on how PEU's make money:

...very little equity was put in, and complicated financial structures were used to enhance the returns.

Leverage and easy credit have returned to levels prior to the financial crisis.   Liquidity recapitalizations, affiliate debt-for-dividend financial restructuring, exploded after the financial crisis.  China Daily had this to say on PEU's love Chinese companies 

Taking a company private, he added, is normally a complex business, but the "distance, differences in accounting rules, and unusual corporate structures" involved in privatizing a Chinese company are "likely to lead to bigger disputes over what a company is actually worth".

In the Washington, D.C. world of power and influence, how might WaPo help Carlyle fund raise, given their spreading Rubenstein's "Top Ten" list of PEU changes?

Carlyle's Latest Cash In

The Carlyle Group did not separate itself from its private equity underwriter (PEU) peers based on financial results for the first quarter of 2013.  Blackstone and Apollo Global Management's results showed large gains vs. a year ago.

PEU's big paydays come from monetizing affiliates.  In Q1 Carlyle realized 45 private equity deals for nearly $3 billion, an average of $66.4 million per deal.  That seems rather paltry for a firm expecting to make 30% annual returns on investment.

PEU's profit by selling their stake in publicly traded affiliates or private sale to another buyer, often a fellow PEU.   Q2 could have Carlyle flipping more affiliates.  Carlyle is currently shopping Coates Hire, an Australian firm which specializes in equipment rental.  Carlyle paid $1.5 billion for Coates and expects over $3 billion from its sale

Carlyle will sell 15 million shares of Wesco Aircraft for proceeds of $240 million.  It sold 7.5 million shares of affiliate SS&C at a price of $32.20 per share and its remaining 20.3 million Hertz shares for $23.62 apiece.  In addition Carlyle backed Chinese firm GDC filed for a $75 million IPO on NASDAQ.

Wesco - $240 million
SS&C - $241 million
Hertz - $480 million
GDC - $75 million

That's over $1 billion in stock sale proceeds.  Also, Carlyle plans to take General Lighting public in Saudi Arabia. 

Q2 also saw Carlyle's co-founders set up their personal cash-in of Carlyle Group stock, even as work to remake the world in their PEU image.

Update 5-29-13:  Add a 3.9 million share sale of Boston Private Financial Holdings stock by Carlyle affiliate BP Holdco and another $40 million goes into the Carlyle kitty.

Carlyle Group: Financial Engineers

MarketWatch reported:

Co-Chief Executive Officer David M. Rubenstein discussed the top ten changes to the private equity industry following the Great Recession. 

In ValuCast, Mr. Rubenstein discussed trends and developments in the industry, including: 

-- Increased regulatory and public scrutiny

-- Emergence of the individual investor

-- Changes in fundraising dynamics

-- Institutional investors seeking a greater variety of products and strategies

-- Traditional private equity firms becoming alternative asset managers

-- Increased focus on operational improvement versus financial engineering 

Rubenstein bragged on private equity underwriter (PEU) use of financial engineering, but blamed other factors, like unprecedented tumult, when things went awry?   

CNN Money came to Rubenstein's rescue two years ago on this topic:

"Financial engineering" is not some phony phrase created to make private equity look bad. It's used to describe the ways PE firms turn profit outside of the differential between purchase and sale price (using lots of leverage, dividend recaps, deal fees, etc.

The Great Recession created a period with a negative differential between purchase and sales price.   That caused more dividend recapitalizations, referred to as liquidity recaps by Carlyle's Rubenstein. 

Rubenstein sells PEU, 24 hours a day. 

Duke University's PEU Board Chair

The Duke Chronicle reported:

The Board of Trustees elected David Rubenstein, Trinity ’70, as Board chair in its meeting this weekend. Rubenstein, co-founder and co-CEO of private equity firm The Carlyle Group, is well known for his philanthropic support of the University, having donated over $50 million to the University. His most recent contribution to Duke was a $10 million donation to the Sanford School of Public Policy, announced Apr. 30. He has been on the board for eight years, and has spent the last two years serving as co-vice chair with Jack Bovender, Trinity ’67 and Graduate School ’69.

David Rubenstein earned billions as a private equity underwriter, which he's ready to give away as a member of the Bill Gates Giveaway Club.  Private equity underwriters buy and flip companies.  Rubenstein brags of Carlyle's 30% annual returns and has been know to show displeasure at removing PEU's preferred tax status.

PEU ties to Duke's board include Rubenstein's former Co-Vice Chair Jack Bovender.  Bovender's HCA sold out to KKR, increasing health care costs by billions in interest expenses.  In addition KKR bled over $4 billion in cash from HCA prior to taking the company public.  Bovender sits on the board of Bank of America.

PEU's became ubiquitous in the last decade, which might be foundational to Rubenstein's comment about Duke's board:

“The Board is not divided as some university boards that have big splits,” he said. “This Board works very collegially. It’s a pleasure to sit through the board meetings.”

Duke's board isn't divided, like the University of Virginia, a fellow ACC institution.  Ironically UVA's board split along private equity lines.

Duke has an administrator-faculty split, which expressed in the Board meeting over online education.

Provost Peter Lange discussed online education with the Board in the aftermath of the Arts and Sciences Council voting down for-credit online courses.

The Arts and Sciences Council vote broke a pre-existing contract with internet education company 2U, which entered the University as a partner in the company’s Semester Online consortium of schools.  Prior to the vote, neither the decision to pursue online courses for credit nor the decision to sign with 2U was voted on by any faculty body or committee. 

Lange said the discussion with the Board was brief. They discussed why the issue was voted down and how administrators will follow-up on the matter in the Fall. 

He said the outcome of the faculty vote was in large part a result of timing. “The intense opposition came up very late and we had to get a vote by the end of the semester if we were going to start in the Fall, so things got kind of squeezed,” Lange said. “As a result we weren’t really able to talk through all the issues with people who were so intensely opposed and the vote went against us. It was really low key.” 

He added that administrators still plan on moving forward with Semester Online, but did not specify in what capacity.

2U is a PEU affiliate of Highland Capital, Bessemer Venture Partners, Redpoint. Ventures Semester Online is a joint venture between 2U and top tier universities.  2U is really 2tor, which was formed in 2008.  SEC documents indicate 2tor raised $26 million in capital in March 2012, their fifth capital raise.

2U's CEO and co-founder Chip Paucek graduated from George Washington University with a degree in political communication.  He started Cerebellum Corporation, which focused on educational videos and online resources for elementary, middle, high school and college educators and students.  He also worked for two other venture companies and a political campaign over his professional career.

Chip's bio at former employer Educate, an Apollo sponsored entity, stated:

Christopher (Chip) J. Paucek became the President of Educate Products in November 2005. From January 2005 to November 2005 he was General Manager of Hooked on Phonics and from July 2004 to January 2005 he was Vice President of Corporate Business Development for Educate, Inc. From January 2004 to November 2004, he was Deputy Campaign Manager of U.S. Senator Barbara Mikulski’s 2004 re-election campaign. In December 1993, he founded Cerebellum Corporation and served as Co-Chief Executive Officer from that month until January 2004. Cerebellum Corporation sold products under the Cerebellum and Standard Deviants brands and produced, among other things, the PBS television series Standard Deviants.

Educate management led a buyout of the company with backing from Sterling Capital.  Analysis of the deal highlighted numerous problems relative to Educate products, including poor mix and sell through.   

Private equity's goal is to flip companies for big profits.  How will Duke help 2U's CEO and PEU owners cash in big?  How will Board Chair & PEU David Rubenstein factor into the equation?

Carlyle Group's Synagro Bankruptcy Tale

The Taft Midway-Driller reported:

Synagro Technologies, the company that operates the organic composting facility on South Lake Road near Taft, filed for bankruptcy last month to seek a court-approved restructuring of its mounting debt. In addition, a $10,000 check, Synagro's annual sponsorship for the Taft Chamber of Commerce, bounced, the Taft Midway Driller learned. 

A Synagro spokesperson, who asked not to be identified, told the Taft Midway Driller that Synagro intended to make good on the payment and said the bankruptcy filing was merely for reorganization.

A bankruptcy is to handle claims by creditors, which includes debt holders and suppliers.  The Taft Chamber of Commerce's claim should be in the bin with the rest. 

Synagro once looked like black gold to The Carlyle Group, a huge private equity underwriter (PEU).  Synagro's sewage sludge contract with the City of Detroit looked like a done deal, then it didn't.  With pressure from Carlyle and Synagro executives two salesmen tried to fertilize the deal with bribes.  The Detroit Free Press reported:

In October 2007, seven weeks before the Detroit City Council was to vote on the sludge-hauling contract, Rosendall was feeling heat from Synagro headquarters.

In a phone conversation with an aide to Kwame Kilpatrick, Rosendall complained of getting his butt kicked by his bosses in Houston. Executives, he said, were feeling pressure because they had promised the Carlyle Group that the Detroit deal was in the bag.

Detroit was to be Synagro's largest municipal sludge-disposal contract, bigger even than New York City. The company expected profits of up to $5 million a year for 25 years from annual revenues of $47 million.

Carlyle, one of the world's largest private investment firms, bought Synagro months earlier, largely because of the potential in Detroit.

Yet, prosecutors didn't pursue charges against Synagro or its PEU owners:

"It's hard to explain why charges weren't filed against the company, given the turning of a blind eye by senior executives," said Wayne State University law professor Peter Henning, an ex-federal prosecutor and white-collar crime expert. "There are any number of cases in which companies have been charged for this kind of conduct, when you have the involvement of more senior employees."

Approval of bribes is hardly turning a blind eye.

"Synagro is a party to this conspiracy ... and yet, for some reason, they are not here."

Legal experts say corporate executives can be charged if they had knowledge of their employees' illegal conduct -- or deliberately ignored it.

Jennifer Arlen, an expert in corporate criminal liability and a law professor at New York University, said the Justice Department has been less receptive to charging a corporation itself because that can hurt innocent shareholders.

Innocent equity owners, like The Carlyle Group? 

Carlyle was unhappy with the demise of the Detroit contract, and up to $5 million a year in lost profits.

That's why Synagro entered bankruptcy and is merely "reorganizing."  It's another Carlyle PEU Tale. 

Barron's Doesn't Recognize Political Influence

Barron's reported on a spate of hedge funds trying to make a fortune on Fannie Mae and Freddie Mac. 

A number of profit-minded investors that have taken positions in the preferred shares of the formerly distressed mortgage companies are pushing an alternative. The politicians, they claim, are blowing an opportunity both to generate at least $100 billion in deficit reduction from a spinoff to the public and to significantly limit the government's footprint in the mortgage market. Recall that in last month's budget, President Barack Obama took a huge political risk in calling for the sale of the government-owned Tennessee Valley Authority for about $25 billion to help reduce the deficit. 

The financial acumen of these investors—which include hedge funds Paulson & Co.; Claren Road Asset Management, owned by the Carlyle Group; and Perry Capital—stands in stark contrast to their seeming naiveté about Washington. No matter how sensible on paper, their investment is unlikely to succeed. As one of my D.C. sources quipped, "Congress can't fix the Post Office, let alone Fannie and Freddie." 

The Carlyle Group is naive about Washington, D.C.?  Given Carlyle chose D.C. in order to profit from federal business and influence legislation/policy, Barron's writer appears the naive one. 

A look at prior Fannie Mae and Freddie Mac board members and executives reveals a who's who of Washington, D. C. navigators.  It would be the final insult to taxpayers, after rescuing Fannie and Freddie, to have the Carlyle Group make another ten bagger.