It's a PEU World: 30,000 Foot View

Over half of U.S. companies are owned by private equity underwriters (PEU) according to FT.  Milken Institute researchers published "Companies Rush to Go Private" in August 2018.  Michael Milken is considered the founder of leveraged buyouts which morphed into private equity.

Private equity owned/backed companies are much smaller than their public counterparts.

The PEU model initially loads affiliates with debt, deal fees and annual management fees.  It often adds another layer of debt to pay its sponsor (the PEU) a special dividend/distribution as well as more deal fees.

Workers have seen their wages stagnate as PEU ownership spread like a toxic chemical spill.  The billionaire class which is widely represented in the PEU community received the economic benefits while workers did not. 

The period from the black line to today corresponds with the time frame from the first graph showing how private equity underwriter owned firms became ubiquitous.

Adding debt initially and over time is a signature PEU move.  Micheal Milken was known as the Junk Bond King before he was convicted and sent to jail.  Junk bonds are less than investment grade and carry a concern that they will be paid off.  The concern can rise to whether their next interest payment will be made.

Forbes reported on record issuance of B3 rated bonds and the concern they may default in an economic downturn.

The Financial Stability Oversight Council met May 30th to discuss this very possibility.  The Street,com headline read:

The Financial Stability Oversight Council, a panel of top U.S. regulators charged with preventing future financial crises, met Thursday to discuss the past decade's surge in corporate borrowing, much of it by companies with junk-grade credit rating. An economic downturn likely would bring a wave of credit-rating downgrades and debt defaults that could ripple across markets.

The Board heard public testimony/feedback on the issue.  The PEU boys submitted a report defending their industry as safe and solid.

It read like Carlyle Group co-founder David Rubenstein's 2006 sales pitch for Carlyle Capital Corporation.  CCC was the canary in the coal mine, imploding in March 2008, six months before Lehman Brothers fell..

Federal Reserve Chair Jay Powell sees potential corporate debt defaults as a recession amplifier but noted times are good in a House of Representatives report on leveraged lending.  Powell worked for The Carlyle Group for eight years. 

Rest assured the PEU boys have something to sell and they want the little investor to buy.  The Milken report offered:

Regulations that segregate investment opportunities, and exclude large groups of investors from profitable investment opportunities have severe consequences that include worsening the distribution of wealth. Such exclusionary practices raise thorny social justice issues regarding whether all investors should have equal access to investment opportunities.

However, as more companies are owned by PE funds in which households cannot invest, social policy questions about the fairness of maintaining an unequal distribution of investment opportunities need to be addressed. Moreover, legislation that mandates listed companies to meet more social and wealth distribution objectives that are not directly related to the operations of the company, likely will incentivize even more delistings from stock exchanges and exits into private ownership. This, in turn, likely will exacerbate the unequal distribution of investment opportunities and worsen the already skewed distribution of wealth.

There is always a final mark.

Update 6-11-19:  Nearly half of Americans (43%) cannot afford the basics of life.  Regulators are concerned about junk loans and their possible default.  "When the credit cycle finally does turn, UBS estimates investors in junk bonds and leveraged loans could lose almost a half-trillion dollars." (Bloomberg)

Update 6-16-19:  The top one percent of Americans gained $21 trillion in wealth since 1989 while the bottom 50 percent lost $900 billion.

 

Rahm Joins Rubin at Centerview

Former Obama Chief of Staff and Chicago Mayor Rahm Emanuel will join Centerview Partners.  In his senior counselor role Emanuel will establish a Chicago office for Centerview.  Crain's Chicago Business reported:

The long-time Democrat decided not to seek a third mayoral term last year, after several decades in the political sphere, including as a senior adviser to President Bill Clinton, a three-term U.S. House representative from Illinois and chief of staff to President Barack Obama. After he left the Clinton White House, Emanuel was a Chicago-based investment banker with Wasserstein Perella for two years through 2000.

Emanuel will work alongside former Treasury Chief Robert Rubin, also a Senior Counselor for Centerview Partners.  Rubin joined the firm in 2010.

Rubin and his successor, Lawrence Summers, pushed for several policies that benefited Wall Street. The most significant were thwarting an attempt to regulate financial derivatives and repealing the Glass-Steagall Act, which separated commercial and investment banking.

Emanuel made $18 million in two and a half years working for Wasserstein Perella.   Politico noted:

Emanuel turned big Democratic donors and others he’d met during his White House years into clients for Wasserstein Perella, a firm that was led by Bruce Wasserstein, a hefty financial supporter of Clinton.

One of Centerview's co-founders, Robert Pruzan, worked at Wasserstein Perella.  Pruzan and Blair Effron founded Centerview in 2006.

Emanuel's mentor Bruce Wasserstein died in 2010.  Vanity Fair reported:

This is the same Bruce Wasserstein who deprived the state and city of New York of some $75 million in capital-gains taxes (12 percent of his capital gain of around $625 million) when he claimed to have moved his residence to London in 2001, after he had sold Wasserstein Perella to Dresdner Bank.

Rahm will be reunited with Rubin, the man who helped break the world.  It sounds like the premise for a horror movie.

Emanuel is a brawler. He’s legendarily tough and effective and ruthless. He's the type of guy who makes enemies, then makes lists of his enemies, then makes lists of his enemies’ friends, then makes lists of how they’ll pay.

Emanuel picked up a knife and called out the names of different politicians who had “f–––ed us.” After each name, Emanuel would cry out, “Dead man!”—and stab the knife into the table.

Jerk Rahm joins the man who ramped up risk to benefit the greed and leverage boys.  Apparently $18 million isn't nearly enough for retired politicians and their financial backers.  Emanuel has more brawling to do.

Update 10-22-19:  Bloomberg reported a Centerview staffer worked with a peer at Moelis to sell insider information and the pair received over $1 million for their dastardly deeds.

Milken History for Younger Generations

Zerohedge reported on the interview with an interesting question:

Q:  "Why do younger generations seem to be losing faith in the free enterprise system?" -- Host Michael Milken

A:  "This is an entire (group of people) that don't know history." --  Ken Griffin

They may not know Cold War history but they lived through a significant financial event.  The young adult generation were children during the 2008 economic crisis.  They could sense the stress their parents, family, community and our society experienced during that crisis.  President George W. Bush and his advisors were clearly rattled and mobilized trillions ($) to save Wall Street. 

Conference host Michael Milken was part of an earlier economic crisis, one handled by President George H. W. Bush.  Before we enter that period of history consider Milken's bio which states:

Between 1969 and 1989, he revolutionized capital markets by pricing and rewarding risk more efficiently and democratizing access to capital. He financed thousands of companies that collectively created millions of jobs.

Had Mr. Milken achieved his claim he would not have gone to jail nor would the federal government have to bail out the Savings and Loan industry.  Consider his history:

The NYTimes reported in 1990:

Savings and loans played a central role in the development of the junk bond market, and many of Mr. Milken's largest clients were savings institutions that invested heavily in junk bonds underwritten by Drexel. In the rescue legislation signed by President Bush last summer, savings and loans were required to sell their junk bond holdings by 1994. The junk bond market has since collapsed, and institutions are having trouble unloading their holdings.

Last fall Drexel pleaded guilty to six criminal charges that described Mr. Milken as being at the crux of schemes which allowed the firm to cheat a client, trick a corporation into being taken over and manipulate the marketplace. In early February, faced with mounting financial pressure, Drexel collapsed and is now liquidating.

The move that led to Mr. Milken's downfall was his decision to provide hundreds of millions of dollars in financing to Mr. Boesky's stock trading corporation. Because Mr. Boesky was betting on takeovers, many of which Drexel put together, the relationship was viewed on Wall Street as questionable if not a clear conflict-of-interest.

According to the Government charges against Mr. Milken, Mr. Boesky was frequently called by the financier and instructed on investments to make. Those instructions were intended to benefit Drexel, sometimes to the disadvantage of the firm's clients.

That does not sound like pricing risk more efficiently or democratizing access to capital.  For his criminal deeds Milken paid a $600 million fine and was sentenced to ten years in jail.

Judge Wood said the former financier had to be sentenced to a long jail term to send a message to the financial community, and also because he chose to break the law despite his advantages of position and intelligence.\

"When a man of your power in the financial world, at the head of the most important department of one of the most important investment banking houses in this country, repeatedly conspires to violate, and violates, securities and tax laws in order to achieve more power and wealth for himself and his wealthy clients, and commits financial crimes that are particularly hard to detect, a significant prison term is required," she said.

Milken served 22 months.   Congress estimated in 1992 a $215 billion cost to clean up the Savings and Loan Crisis.  The report said this amounted to $800 for every man, woman and child in the U.S.  

The full extent of Mr. Milken's wealth has never been publicly disclosed. But he is expected to remain a very rich man despite the fine,

Reformed crook Michael Milken helped democratize government bailouts for the financial industry while maintaining his ill begotten gains.  He is the poster child for the private equity underwriter (PEU) class.  The greed and leverage boys believe unconstrained free markets (with significant government subsidies) are the solutions to all of America's ills.

The younger generations know this not to be true.  It's in their lived childhood experience.  The older generation should know better but greed is an tantalizing, unrelenting taskmaster.     

Update 3-16-21:   Matt Stoller reported Milken's PEU Stone Canyon is in a position to corner the salt market.  Municipal road salt budgets could soar under monopolistic price gouging.  I am sure philanthropist Milken will give away any funds made from ripping off struggling U.S. cities.  It's the PEU way.

Carlyle to Pull $1.35 Billion Out of PPD

Arabian Business.com reported:

Hellman & Friedman LLC and Carlyle Group LP are seeking to take as much as $1.35 billion of cash out of drug research company Pharmaceutical Product Development LLC. 

The firm’s private equity owners are seeking approval from some of PPD’s creditors for the dividend plan, according to people familiar with the matter. To fund the payment, PPD is mulling the sale of a risky type of junk bond called PIK toggle that allows a borrower to delay interest payments, said the people, asking not to be identified discussing a private matter. 

The plan to take cash out of PPD - one of the largest providers of outsourced clinical research whose clients have included GlaxoSmithKline Plc and Pfizer  - comes at a particularly turbulent time for the health care sector.  

In this case, the debt would be issued by PPD’s holding company, ranking it below most of PPD’s existing borrowings and one step further removed from the company’s assets, the people familiar said. 

Affordable healthcare is the public's biggest worry and has been for decades.  Private equity underwriters are ubiquitous in healthcare and have added significant costs to the system. 

Carlyle Group and Hellman & Friedman acquired PPD in 2011, in a deal valued at $3.9 billion. The Abu Dhabi Investment Authority and Singapore’s sovereign wealth fund GIC joined as minority investors in 2017 as part of a recapitalisation that valued the company at more than $9 billion. 

Greed lives and elected officials cater to the PEU boys and their insatiable longing for more money, power and influence. What's another $1 billion among friends?

Update 4-30-19:  Pitchbook ran a piece on the proposed $1.4 billion dividend Carlyle plans to suck out of PPD.

(PEU Report noted Carlyle's original purchase of PPD and it's strange 2017 deal.  Other PEU PPD pieces can be found here.)

Apollo Crammed Down CEVA Executives It Required to Buy Stock in Affiliate

Apollo Global Management LLC purchased CEVA for $1.9 billion in November 2006.  The deal required CEVA executives to invest in their private company's stock.  Bloomberg reported:

Shortly after the CEVA purchase, Apollo acquired another logistics company, EGL Inc., for $2.1 billion, doubling the debt on the books of the merged company.

Apollo says that in 2006 and 2007 managers were given the opportunity to invest since it would give them “skin in the game.”

By 2007, CEVA’s bonds had started tumbling and Apollo began buying. From 2007 to 2011, Apollo purchased CEVA bonds for an average price of 50 cents on the dollar, according to an Apollo document.

In 2013 Apollo forced a recapitalization of CEVA as the major holder of the company's debt.  The move made CEVA's nonpublic stock worthless, including company stock executives had been forced to purchase.

CEVA rolled out a new share plan in 2013 that offered managers the possibility of recouping losses -- if they gave up the right to sue. 

CEVA went public in May 2018. In November, Apollo sold its remaining stake. Taking into account management and transaction fees, the buyout firm made a profit on the deal.

To sum up, Apollo bought two companies, CEVA and EGL, and loaded them with debt.  Shortly after completing the deal investors deemed the company a poor risk and the price of its bonds cratered.  Apollo took advantage and bought back the debt at a 50% discount.  They used that debt to zero out the companies nonpublic stock.  Apollo and other debt holders received the new equity for the firm.

In 2013, when Apollo’s debt-for-equity swap rendered CEVA executives’ shares worthless, current and former managers say they were shocked.

There is nothing shocking about the PEU boys and what they will do to fulfill their ceaseless greed.  Apollo had their sticky fingers in on every side of the deal. 

Carlyle's AsiaSat Pipe Full of Smoke

WSJ reported:

Orbiting 22,000 miles above Earth, a fleet of American-built satellites is serving the Chinese government in ways that challenge the U.S.

TechCrunch added:

The Chinese government has been using a private company jointly owned by a U.S. investment firm and its Chinese counterpart to expand its surveillance and telecommunications capabilities using American technology,

At the center of the Journal’s reporting is a company called Asia Satellite Telecommunications (AsiaSat). It’s a satellite operating company acquired back in 2015 by U.S. private equity firm The Carlyle Group and Chinese private equity firm CITIC Group. Both Carlyle and CITIC are known for their ties to government in their respective home nations.

Carlyle pretended to be hand's off regarding uses of AsiaSat's satellites.

In statements to The Wall Street Journal, Carlyle said that AsiaSat’s equipment supports internet and phone communications for Chinese telecommunications carriers.

“It is effectively a pipe,” Carlyle said in a statement to the Journal, “and AsiaSat, because of privacy issues, doesn’t monitor or regulate the content that flows through it.”

Carlyle has long read U.S government tea leaves and profited handsomely.  The politically connected private equity underwriter (PEU) went global some time ago.  It promotes Carlyle as creating opportunities in virtually every market around the world.

Before Carlyle laid any pipe it was well aware of the market for what could flow through it. 

Carlyle has two managing directors on AsiaSat's board of directors. 

I'm sure they are well aware of the market opportunities available to AsiaSat from a repressive Chinese government.  Carlyle demands it as well as grand returns.  The greed and leverage boys will obfuscate when their mendacity is revealed.  It's like blowing smoke from a pipe....

Healthcare Nonprofits Go PEU

Over 40,000 players attended the J.P. Morgan healthcare conference for 2019.  Becker's Hospital Review reported:

Over the last decade, there has been a massive level of consolidation with hundreds of hospitals and thousands of physician practices being acquired every year. While more mergers and acquisitions will still happen, this stunning and fundamental restructuring of healthcare delivery has taken place and there is no turning back. This is likely the single biggest shift relative to how healthcare is structured in this country that will take place during our lifetime, and it barely gets mentioned.  

Private equity underwriters (PEU), great acquirers, barely get mentioned as a cancer on our economy and workplace.  Becker's noted how nonprofit hospitals act like PEUs:

Spectrum Health has a $100 million venture fund. Providence St. Joseph's Health announced a second $150 million venture capital and growth equity fund. Mayo Clinic Ventures has returned over $700 million to their organization. Jefferson Health has a 120-person innovation team focused on digital innovation and the consumer experience, partnering with companies to build solutions.

My consumer experience has been that I pay more each year for less healthcare coverage.  I've paid out of pocket for the few health services I've consumed.  Friends work for large healthcare companies, nonprofit and for-profit, and many feel abandoned by executives misplaced priorities. 

Bad managers only know how to act with data and often do so without an understanding of variation.  Thus they made decisions that waste time, money and harm people.

... the lifeline for every health and healthcare hub will be actionable data. Applied analytics is a boring term that is actually gaining traction and starting to dislodge buzzwords like big data, machine learning and artificial intelligence relative to its importance to healthcare providers.

What happens when healthcare leaders are unable to tell the difference between correlation and causation?  How much harm will they cause?

Employees did not show up in the future of healthcare.  I predict healthcare will get much worse under these PEU management practices.  Nonprofit healthcare systems have downed the language/strategies of the greed and leverage boys.  This is most concerning.  A dark future awaits. 

Update 3-27-19:  Two large government health insurers, Centene and WellCare, announced a deal today.  An activist with ALS offered "... this is how they do business—deny, deny, delay, and then people give up."  So much for platforms and big data.