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.  

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.