Rubenstein Recalls His Book

Showbiz*411 reported:

A few years ago Rubenstein signed a contract with HarperCollins for a book called “Beyond Wall Street: Inside The Rise Of Private Equity.” It was listed in all the HarperCollins catalogs and due for publication in 2009. Well, calendar pages flew by, and the most recent date scheduled was for December 2015. But that date came and went. Now I’m told that Rubenstein has pulled the book, even though it was written, edited, and ready to be sold.

Google Books promoted Rubenstein's book with:

A founder of the Carlyle Group explains how a rise in private equity is changing the future of investing, in a guide that covers how private equity works, the inner functions of private equity firms, and how everyday investors can make significant returns.

Book Depository.com hawked the book with:

Rubenstein offers the first look at an industry that touches ordinary investors through pension funds, university and charitable endowments, and funds that may someday be available to almost anyone who is attracted to returns that consistently outperform the stock market

I'd like to think PEUReport chronicles the meteoric and frightening rise of private equity underwriters over the last nine years.  WSJ just did a piece on a Carlyle fund that echoes these themes.

Another Rubenstein Carried Interest Story

ProPublica reported how Carlyle Group co-founder David Rubenstein ensured wealthy private equity underwriters (PEU) would continue paying minimal taxes via their preferred carried interest taxation.

On June 8, 2010 Rubenstein’s cell phone rang as he was speaking to supporters of the Economic Club, at the Phillips Collection. He left the stage to take the call. Among those in the audience was Gary Shapiro, the consumer-electronics lobbyist who was Rubenstein’s travel companion to Japan in the ’80s. After a few minutes, Shapiro recalls, Rubenstein returned and said, “That was a senator. That one call just saved us on carried interest.”

PEUReport readers know how Presidents George W. Bush and Barack H. Obama curry favor by dining with Mr. Rubenstein and his wife Alice Rogoff.  ProPublica also told a number of dinner stories.

The first serious run at removing the carried interest loophole came in 2007.  PEUs won.  Another attempt occurred in 2010.  PEUs won.  The next year America learned about the policy making billionaire.

Today elected officials are no closer to righting this wrong.  Americans are clearly concerned about our abysmal leaders, who seem to serve billionaires over the common man.

It's been a tough decade since the public learned about carried interest and our elected officials sat on their fattened hands.  Thank heaven ProPublica noticed what others have.  It's a bipartisan world with lots of love for PEUs.  Politicians Red and Blue love PEU.

Lewitt Identifies Two Worrisome PEU Moves

Michael Lewitt's Sure Money reported:

The private equity industry is under serious pressure right now.

With the Super Crash on the way, financial stocks are taking a beating – particularly private equity stocks like Apollo (APO), Ares (ARES), KKR (KKR), Blackstone (BX), Carlyle (CG), and Fortress (FIG). The thing all of these companies have in common is heavy exposure to the high debt levels that built up since the financial crisis. The market is telling us that it is very worried that the Debt Supercycle is over and that a lot of this debt isn’t going to be paid back.

Carlyle is off its lows from several weeks ago.  Lewitt is concerned about two private equity practices given the huge debt levels corporations. i.e PEU affiliates, have taken on.  Private equity firms also package, sell  and service corporate debt through collatoralized loan obligations (CLO). 

Concerning practice #1 is well know to PEU Report readers., dividend recaps or what I call dividend bleeding.

The first “private equity indicator” I watch for is an increase in the frequency of “dividend deals.”

Also known as a “dividend recapitalization,” this infamous transaction involves a private equity‐owned firm borrowing money to pay a dividend distribution to its owners. We’ve seen this behavior all over the news lately – KKR-backed GenesisCare seeking $285m in loans, American Tire Distributors acquiring $805m in junk bonds to pay dividends to TPG Capital, JCrew borrowing $500 million to cash out its shareholders, and Vogue International LLC borrowing over $200 million to pay a shareholders’ dividend to The Carlyle Group.

The debt raised in these transactions is not used to enhance the business of the borrower in any way, for example, by building additional facilities, funding research and development, creating new products, or hiring new workers. The money instead is paid out to the private equity sponsor in order to reduce the capital it originally invested in the business.  It saddles companies with more debt while reducing or eliminating any skin that the private equity firm has in the game – leaving bondholders holding the bag.

Practice #2 is monetizing a PEU affiliate via sale to another PEU.  Rarely is the price paid revealed in a PEU to PEU deal.

This second practice that indicates that the credit cycle is entering its terminal stages is the phenomenon of private equity‐owned companies being sold by one buyout firm to another, which I call “passing the hot potato.”

This has been happening at a dizzying pace lately – if you’ve been tracking our failing private equity firms, you’ve seen Ares Management buying CHG Healthcare Services from J.W. Childs Associates and snapping up Farrow & Ball from European Capital Limited; KKR selling off TASC Inc. to Engility Holdings; Blackstone and TPG teaming up to buy Kensington Group from Investec; and Blackstone selling GCA Services to Goldman Sachs Group Inc’s private equity arm and Thomas H.Lee Partners LP.

Selling an affiliate to a peer avoids public disclosure.  It enables the repricing of asset values and debt to be reissued.  It also enables both PEUs to charge deal fees.

The real reason such deals are done, of course, is to generate fees for private equity firms. The selling firm is able to generate a “realization event” that triggers a “transaction” fee and allows it to return capital to investors, while the buying firm is able to pay itself a transaction fee on the purchase. The wonder is that lenders continue to finance such transactions, which are done at higher and higher multiples of cash flow and contribute little to economic growth.

Carlyle frequently charges a huge fee to make up for losing years of expected PEU management fees.

Private equity firms have mastered the art of enriching themselves at the expense of virtually everybody else with whom they come into contact in the economy.  

Lewitt believes the credit cycle is nearing a bad end.  That would spell trouble for PEUs.

City of San Angelo Sues PEU Owned Hirschfeld

The Standard Times reported:

What began as a promising multimillion-dollar economic venture to generate hundreds of wind energy-related jobs in San Angelo turned into an undertaking that blew south.

The city of San Angelo Development Corp. and the city are seeking to recoup more than $2.7 million in damages, attorneys' fees and minor costs resulting from a 2009 investment to bring a wind turbine tower fabrication plant to town.

COSADC and the city hope to recover the money through a summary judgment hearing scheduled Wednesday in the 119th District Court and avoid going to trial.

The City's press release cited the difficulty negotiating with a private equity owned company.

Negotiating with the private equity hedge fund that today controls Hirschfeld is more challenging than partnering with local ownership with whom the City has had close personal and working relationships for decades.

Texas politicians, starting with Governor Rick Perry, trained PEU owners and affiliates that public money was loose and nearly free.

 "The City and the COSADC could not agree to a minimal repayment," the release stated. "Doing so, and allowing Martifer-Hirschfeld to walk away with millions in taxpayer dollars, would constitute a serious breach of public trust."

It's hard for Insight Equity to monetize Hirschfeld with a multi-million dollar lawsuit hanging over its head.  The City of San Angelo is the first I've come across that cited a PEU owner in suing for economic nonperformance.  I hope it becomes a trend.

Rubenstein Excited About Next SuperReturn Cycle

WSJ reported:

Private equity firms will be able to snap up businesses cheaper in 2016 due to jitters over the health of the global economy, according to Carlyle Group 's co-founder David Rubenstein. 

“You are going to see much more money invested [by private equity] because lower multiples will be prevalent,” he said. “There’s a recession every seven years and we haven’t gone more than nine years without a recession. The last recession ended July 2009, so [in] June 2016 some people say something bad is coming along.”

Private equity firms have been complaining about high valuations for businesses and how this has depressed private equity investment levels for the past two years.

Rubenstein stayed away from predicting a recession but the more distressed an economic sector the greater chance for private equity underwriters to bottom fish.  Carlyle's co-founders have a fresh $300 million between them to lure trophy firms.

Carlyle Dumps DGAM Hedge Fund of Fund Unit

The Carlyle Group will close Diversified Global Asset Management, its fund of hedge funds platform acquired in November 2013.  DGAM had $6.7 billion in managed and advised assets when it joined the Carlyle family.  It currently has less than $2 billion in assets under management.

DGAM's poor performance is similar to Carlyle's Claren Road hedge fund, which fell from $8.5 billion in 2014 to just over $1 billion, according to SeekingAlpha.

Between the two investment vehicles Carlyle saw AUM drop $12.2 billion.  It would be interesting to see DGAM and Claren Road's actual performance as Carlyle affiliates.

Update 2-28-16:  ZeroHedge reported investors withdrew $25 billion from hedge funds in January

Pervasive Management Loves Numbers, Not People

Data and analytics are buzz words in the C Suite.  Many firms are hiring Chief Data Officers (CDO).  That CDO is different than collatoralized debt obligations, but both have their root in complexity and mathematics.

Modeling is not new in the financial world.  Wall Street used statistical algorithms to destabilize trading exchanges and convince investors inherently risky products were safe.  Consider the case of David Li whose statistical models somehow made junk securities Triple A rated.

He just invented the model. Instead, we should blame the bankers who misinterpreted it. And even then, the real danger was created not because any given trader adopted it but because every trader did. In financial markets, everybody doing the same thing is the classic recipe for a bubble and inevitable bust.

Correlations are statistical associations which can change at any time.  They are not cause and effect.  Consider the Super Bowl winner's impact on the stock market.

You may not know it, but the winner of this year’s Super Bowl will be a pretty reliable predictor of how the stock market performs in 2016.  

This phenomenon has an amazing success rate: 82%. In fact, the winning NFL team has tracked how the markets fared the last seven years in a row, as well as for 40 of all 49 Super Bowl years.

Robert H. Stovall, an analyst who’s popularized the predictor, admits it has no grounding in fact. “There is no intellectual backing for this sort of thing,” he said in an interview with the Journal, “except that it works.”

Corporate executives do many things with data, a number of which also have no intellectual backing.  They optimize executive compensation to the detriment of the company and its employees.


HBR noted the latest management obsession and suggested asking questions about algorithms/models.

1. What was the source of your data?
2. How well do the sample data represent the population?
3. Does your data distribution include outliers? How did they affect the results?
4. What assumptions are behind your analysis? Might certain conditions render your assumptions and your model invalid?
5. Why did you decide on that particular analytical approach? What alternatives did you consider?
6. How likely is it that the independent variables are actually causing the changes in the dependent variable? Might other analyses establish causality more clearly?

Knowledge of variation, analytical vs. enumerative statistics and subject matter expertise are also critical.   It's important to know how numbers are generated/calculated.  It's important to look at data over time with an eye on improving quality.  And it's critical to remove threats, fear and intimidation so numbers can be honest and accurate.  Most important leadership should be in relationship with the people they support.

That hasn't been the case for quite some time in America's hallowed halls of leadership.  Management likes numbers that produce selfish rewards.  They prioritize additional debt and interest expenses over employee raises and maintaining benefits. They spend on faster computer systems and complex algorithms so they can deal with numbers, not real people. 

Senior executives hire consultants who know better than to return bad news.  Thus, they craft questions and surveys that limit employees and customers ability to give feedback because the C Suite really doesn't want to hear what people think.  Executives shoot the messenger when the rare brave soul penetrates the C Suite's Castle walls with salient observations.

Analytics enable executives to avoid interacting with pesky customers or employees.  Many senior managers will delight in replacing employees with algorithms and machine learning.  UBS predicts the Fourth Industrial Revolution will benefit the richest.  The more things change the more they stay the same.