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.

Carlyle Pays DBDs $193 Million

The Carlyle Group's ruling triumvirate, David Rubenstein, Bill Conway and Danny D'Aniello, made big money in 2017 (Bloomberg).  The DBDs took home $193 million in 2017.  

Bloomberg reported:

The founders of Carlyle and Apollo Global Management LLC, unlike peers at Blackstone Group LP and KKR & Co., don’t receive carried interest, or a cut of deal profits. 

Actually, founders don't pay carried interest on their PEU investments.  Carlyle's SEC filing stated their co-investments weren't "subject to management fees, incentive fees or carried interest."  That means The Carlyle Group took a much smaller chunk from founder co-investments than it took from limited partners.   The DBDs got to invest without fees, which were born by other investors.

The filing did not report the DBD's return/profits from co-investments.  Those could easily dwarf the $193 million reported.

Carlyle Funds Founders' Private Jets

Private jets are used in the normal course of billionaire events.  The Carlyle Group paid $3.33 million for the use of Mr. David Rubenstein's private jet, $1.2 million for Mr. Daniel D'Aniello's and $479,586 for Mr. William Conway's.  Here's the DBD breakdown per Carlyle's recent SEC filing.

In the normal course of business, our personnel have made use of aircraft owned by entities controlled by Messrs. Conway, D’Aniello, and Rubenstein. Messrs. Conway, D’Aniello, and Rubenstein paid for their purchases of the aircraft and bear all operating, personnel and maintenance costs associated with their operation for personal use. Payment by us for the business use of these aircraft by Messrs. Conway, D’Aniello, and Rubenstein and other of our personnel is made at market rates, which during 2017 totaled $8,700 for Mr. Conway, $232,065 for Mr. D’Aniello, and $436,385 for Mr. Rubenstein. We also made payments for services and supplies relating to business use flight operations to managers of the aircrafts of Messrs. D’Aniello, Conway, and Rubenstein, which during 2017 aggregated $470,886 in the case of Mr. Conway’s aircraft, $972,397 in the case of Mr. D’Aniello’s aircraft, and $2,897,308 in the case of Mr. Rubenstein’s aircraft.

PEUs receive outsized benefits from President Trump's tax cuts.  Our White House billionaire clearly knows his constituency. 

Carlyle Still Owns Conflicted ManorCare

The Carlyle Group continues pulling the strings for nursing home giant ManorCare.  Last summer Carlyle said it would cede control of ManorCare to QCP, the real estate investment trust that owns the nursing home facilities.  It hasn't.

Under the lease, ManorCare agreed that QCP would have the right to appoint an independent receiver to operate the facilities in the event of a default.

“HCR ManorCare has refused QCP’s requests to appoint fully independent directors and officers to oversee the skilled nursing and assisted living/memory care businesses at facilities owned by QCP,” the REIT stated. “Instead, the facilities remain under the control of the incumbent HCR ManorCare senior executive team and board of directors, who QCP believes are burdened by irreconcilable potential or actual conflicts of interest, including duties to sister companies in the HCR ManorCare group, personal claims against the HCR ManorCare group and potential personal exposure to HCR ManorCare and/or its stakeholders.

The article left out duties to parent corporation, The Carlyle Group, which commonly charges affiliates management fees.  ManorCare's website showed the two big events that set the stage for the current debacle:

2007
The company is taken private with The Carlyle Group as the majority owner. The name of the company changes to HCR ManorCare.

2011
In a sale/leaseback transaction, company sells 338 post-acute, skilled nursing and assisted living facilities to HCP, a real estate investment trust (REIT) headquartered in California, for $6.1 billion. HCR ManorCare continues to operate and manage all of the assets sold.

HCP/QCP bought ManorCare CMBS debt before striking the big $6.1 billion deal.  HCP hosted Investor Day in May 2015 and highlighted its ManorCare portfolio.

A year later HCP spun off ManorCare's properties to insulate the REIT from its infected investment.

After several years of declining operating results, our executive management team and Board of Directors decided in May 2016 to spin off our HCRManorCare, Inc. (HCR ManorCare) portfolio of post-acute/skilled nursing properties.

In summer 2017 ManorCare's ship sunk underwater from the capital structure imposed by Carlyle.  The rats came out according to the NYPost.

ManorCare CEO Paul Ormond was demanding the immediate payout of a $100 million deferred settlement package. The Carlyle Group, the private equity firm that has owned ManorCare since 2007, had apparently washed its hands and given its blessing to QCP, with Carlyle’s management was actively “ceding control” to the REIT. No such deal ever materialized.

February 2018 found HCR ManorCare failing to pay the Reduced Cash Rent amount of $14 million due on January 25, 2018.  QCP reduced ManorCare's cash rent several  times.  It went from $39.5 million to $32 million to $23.5 million.

The question is why ManorCare hasn't gone into bankruptcy?  It's defaulted on its master lease agreement.

On July 7, 2017, QCP delivered a notice of default under the Master Lease relating to nonpayment of rent due and other matters. The notice of default demanded payment of all current and past due rent, totaling approximately $79.6 million, by the end of the day on July 14, 2017. Such amount was not paid, and therefore, an Event of Default exists under the Master Lease, requiring the immediate payment of an additional approximately $265 million.

Carlyle's David Rubenstein knows banks and leaseholders don't want to take over and run corporations. What does Carlyle gain by dragging its feet?

Update 3-11-18:  ManorCare filed for bankruptcy on Sunday, March 4th.  ManorCare workers who protested Carlyle's purchase in early 2007 feel somewhat vindicated.

Update 11-25-18:  WaPo nailed Carlyle's role in sinking ManorCare.

Davos Ends with Saudi Luncheon, Billionaire Prince Freed

CNBC reported Saudi Arabia is open for private infrastructure investment.  That was one message at the World Economic Forum in Davos, Switzerland.

Vision 2030 is being overseen by Saudi Crown Prince Mohammed bin Salman and centers on three main themes to build a "a vibrant society, a thriving economy and an ambitious nation." A key part of the vision is to increase private investment and the growth of the private sector, which Saudi Arabia hopes will contribute 65 percent of gross domestic product (GDP) by 2030.

Saudi Transport Minister sold the investment opportunities to the Western billionaire class at Davos:

"We have long-term public/private partnership (PPP) concessions that are in play. We are looking at restructuring some of our airports as well, allowing them to be privatized and then the big one is railroading."

Over the last thirty years Davos' billionaire boys railroaded the U.S. economy to their extreme advantage, courtesy of America's Red and Blue political parties.

Billionaires don't invest if their money could be arbitrarily appropriated.  Thus it became important for the new Saudi Crown Prince to release the Royal Family's most Western oriented billionaire.  As Davos closed Prince Alaweed bin Talal gave an interview to Reuters.

The Prince described his three month detention with no word to the outside world as a misunderstanding and he was simply involved in discussions.  His obvious weight loss was due to a vegan diet.

At least the Davos crowd fattened up on Saudi cuisine, sponsored by the MiSK Foundation--Saudi Crown Prince Mohammed bin Salam's effort to engage Saudi youth.

It sponsored the MiSK Global Forum late last year, the biggest youth event in the Middle East.  Disrupt to stabilize is the mantra of Davos' billionaire class.  It appears the Saudis plan to teach their youth PEU ways.

Update 2-10-18:  UK's DailyMail says the Prince's release was a PR stunt in response to a BBC documentary.

Update 2-11-18:  The Riyadh Ritz Carlton reopened for business.  The public is once again invited to book rooms at the luxury hotel.  This should please the Davos boys.

Update 3-10-18:  Western oriented Billionaire Prince Alaweed bin Talal has been banned from giving interviews.  Disrupted, now silenced.

Update 9-30-18:  ArabNews reported on the Crown Prince's PEU effort at Davos earlier this year.

Update 12-4-18:  U.S. Senators heard evidence of the Crown Prince's ordering the murder of a Saudi journalist.

Update 12-28-18:  McKinsey abandoned a Saudi partner who is yet to be released from the Crown Prince's abusive shakedown. 

Update 10-9-21:   The Khashoggi murder is such old news that the man behind the execution is being promoted for his public service by Crown Prince bin Salman.  Further evidence that Khashoggi's brutal killing is in the rear view mirror came from bin Salman led Saudi Public Investment Fund's purchase of Newcastle United.

Update 12-6-22:   The U.S. court case against the Crown Prince was dismissed under the guise of sovereign immunity, something the Prince did not have at the time of the execution.  The judge said his hands were tied by the Biden administration's recommendation to the court.  Thugs win.