McIntire Goes Carlyle

Reading the Spring 2008 edition of CommerceUVA sent me deeper into the rabbit hole. My undergraduate business school magazine highlighted planned course offerings to deal “with the less than straightforward world of alternative investments.”

The piece noted two characteristics of the alternative investment world, populated by private equity, hedge funds and venture capital firms. First, this segment is “one of the most attractive areas of finance” for many Comm School graduates. Second, the article noted “research on alternative investments is scarce.”

Of course a McIntire alum works for The Carlyle Group, the most politically connected private equity underwriter (PEU). Industry heavyweight, Greg Ledford, is a managing director of the infamous PEU. He graduated in the all star UVA class of 1979 that included Katie Couric and Tom Scully. I got my McIntire degree a year later.

While Greg will help the good Comm School professors with case writing and course development, I offer a few suggested studies based on my research on Carlyle the last few years.

Access to liquidity

This study highlights Carlyle affiliate, Vought Aircraft Industries, and its innovative South Carolina joint venture building key frame assemblies for Boeing’s 787 Dreamliner. For failing to deliver on time, Boeing edged out Vought’s interest in the JV. Vought’s CEO cited liquidity problems in ramping up production. Isn’t that Carlyle’s expertise, mobilizing funds? Study how Carlyle covers up this and other blunders while successfully maintaining its good name.

Risk Management

This case involves Carlyle affiliate, LifeCare Holdings, a long term acute care hospital company with 21 sites. Carlyle closed the deal in August 2005. Within weeks Hurricane Katrina slammed the U.S. Gulf Coast. LifeCare of New Orleans lost 24 patients during the storm and in its toxic, sweltering aftermath. Carlyle took a multi-pronged approach to managing this disaster.

First, it kept their good name out of the news articles on the patient deaths. Second, it managed to keep that same good name out of the White House Lessons Learned report on Hurricane Katrina. Despite news footage of President Bush asking FEMA Chief Mike Brown about hospital patients, the facility with the largest patient death toll warranted not one mention in the Bush report. Third, it blamed rogue clinicians for the deaths. When a grand jury failed to indict the physician and nurses, Carlyle’s attorneys offered a truly innovative defense. They say LifeCare patients became wards of the federal government as soon as FEMA evacuation teams set up in New Orleans.

Managing the Media

This becomes a little easier when the private equity firm controls numerous media companies and marshals advertising budgets for over 600 firms. What ad selling media company wants to be banned from that book of business? The case involves the sale of two Carlyle affiliates to Dubai Aerospace, a government controlled investment company in the Middle East.

Over a year prior to the sale of Landmark Aviation and Standard Aero, America erupted in protest over the sale of port operations to Dubai Ports World. Yet, the airport deal involved operations at over 50 U.S. airports. Landmark Aviation has been rumored as a provider of rendition flights which take terror suspects to other countries for detention and interrogation. While the deal included selling off portions of the two companies for national security reasons, the media stayed away from the story.

Shortly after the "no news" airport deal with Dubai, America pulsed again in concern over the sale of the NASDAQ to the Bourse Dubai. Carlyle achieved a virtual media blackout on a hot story, a tribute to their media management skills.

Getting Congress in Their Pocket

Carlyle wrote the strategy for buying political influence. It varies from straight up donations to influential elected officials like Senator Evan Bayh, to hiring ex-high up government insiders (too many to mention), to consulting with government regulators on changes more friendly to PEU’s. In return their affiliates get earmarks, indefinite quantity/indefinite delivery contracts, legislation giving their particular industry favored payment or legal status, and so much more.

This case could go several different ways. If it focused on Senator Bayh, his recent support for sovereign wealth funds ties directly back to his benefactor. Mumbai Development Company, another United Arab Emirates government owned investment company, purchased 7.5% of Carlyle in September 2007. Evan saw no problems with such ownership as long as proper disclosure exists. Carlyle’s most recent effort in the disclosure arena came up short.

It could spotlight Congress in action, say the committee that reviewed Carlyle’s purchase of giant nursing home company, ManorCare. One might expect Carlyle’s past failure to 24 patients during a disaster to come to light during the proceedings, but it did not happen. Congress gave the PEU a Christmas present, allowing the deal to close December 21, 2007. Shortly thereafter, Carlyle created a quality committee to address acquistion concerns.

Another angle would find Carlyle gobbling up the huge government services division of Booz, Allen, & Hamilton. The firm provides consulting and intelligence services to the federal government. As Carlyle aims to provide one stop shopping for the government industrial monstrosity, having their new consulting arm recommend affiliate company solutions seems like a “no brainer.” That includes two of their newer areas of focus, healthcare and infrastructure.

Closing

I’m sure Greg has a different perspective on these situations. However, as a McIntire graduate with over twenty years in health care leadership, I offer this information as the University develops its alternative investment curriculum. Hopefully, it's not too straightforward.

Update 1-23-12:  McIntire Professor David Smith produced a research paper comparing private equity's performance in times of distress.   It's a resounding defense of private equity, which McIntire imitated with its obtuse "differential tuition."  That's no price break for struggling youth, but McIntire's semester driven management fee/dividend bleeding of students..  

 

Update 7-9-21:  UVA's Darden graduate business school is adding special scholarships to draw minorities to private equity.  "Last year, 18% of the graduating MBA class at Harvard went into private equity, 15% of Stanford MBAs, and 12% of Wharton MBA grads."  Private equity destroys corporate resilience by levering predictable cash flows.  It will be interesting to see how the greed and leverage boys respond to Darden's PEU trained minorities.

Fed Looks to Carlyle Group for Ways to Save Banks

Regulated banks got in trouble for loading up on securitized mortgages, a virtually unregulated industry. As they write down the value of their investments, the basic integrity of some banks is at stake. The answer is not to go back and regulate the problem industry, selling packaged real estate loans. Instead the government wants to deregulate banks.

Ready to help avoid oversight and scrutiny is the shadowy Carlyle Group, a politically connected private equity underwriter (PEU). The Federal Reserve Bank doesn't have far to go as Carlyle's corporate offices sit on Pennsylvania Avenue. Of course, Carlyle has an ex-Treasury high up to serve as a go between. Randall Quarles, Carlyle Managing Director and former Undersecretary of the Treasury for Domestic Finance, met with Fed representatives a month ago. PEU's are reluctant to give into oversight, so the Fed is looking to loosen regulations to allow new types of deals.

Banks got into trouble from investing in unregulated products, thus the answer is to deregulate banks so they can be owned by groups with lots of cash but who like to stay in the shadows. And the best way to set these new regulations is to meet with a man who oversaw domestic finance during the height of abusive lending practices. Yes, that should do the trick...(maxed out on sarcasm meter). Rather than save banks, the Bush administration is known for giving out goodies to its corporate buddies. Get ready for another Carlyle Christmas present from the feds, as ManorCare in 2007 wasn't the first, and surely won't be the last.

Exxon Gets "Craps" for Valdez Oil Spill

When the jury issued a $5 billion punitive damage award against Exxon for its role in fouling 1,200 miles of Alaskan coastline with 11 million gallons of oil, the oil company rolled the legal appeals dice. The first toss occurred at federal appeals court and Exxon won, slashing the award in half to $2.5 billion. The firm knew lady luck, as in a Bush appointed Supreme Court, was on its side and doubled down. Craps again! The U.S. Supreme Court reduced an original $5 billion award to a paltry $500 million.

Exxon made over $40 billion in 2007 and expects another gusher year. That equates to $110 million per day. The Supreme Court's fine amounts to less than five days of profit. Bloomberg reported it equals 12 hours of Exxon's sales. How punitive is one work week's profits or a half day of revenue? Not very, so expect another bad case of caveat emptor, otherwise known as buyer beware. From big oil to pharmaceuticals to financial markets, there's little to no penalty for bad acts, especially under a 90% corporate oriented Supreme Court. Only 10% of the people's will got enacted. Now that sounds familiar!

Carlyle Affiliate Hires Government Insider for Burgeoning Business

It turns out the Bush administration's incompetence in spending money wisely is another company's market opportunity. The Carlyle Group, a politically connected private equity underwriter (PEU), announced the hiring of Deidre A. Lee. She will be the Director for Defense and Intelligence Markets for their affiliate, Compusearch. Diedre's most recent stint involved purchasing for FEMA, but she also has Defense Department acquisition experience.

Apparently Ms. Lee wasn't involved in or unable to make up for bad systems that produced quantifiably poor purchasing results after Hurricane Katrina and during America's war effort in Iraq. Consider the glowing words Charles Rossotti, another Carlyle ex-government insider, had to say:

"Dee is one of the most respected leaders in the federal government acquisition community,” said Carlyle Senior Advisor, former IRS Commissioner, and Compusearch Board member Charles Rossotti. “Her track record of improving federal procurement operations is impeccable. She has helped government procurement become more efficient, visible, transparent, and accountable to the American people. Dee’s skills, experience, and passion are perfectly matched to build on Compusearch's 25 years of procurement expertise to tackle the unique acquisition challenges facing our nation’s defense and intelligence communities.”

Funny, Carlyle will close later this year on one of the government's largest intelligence providers, Booz, Allen, & Hamilton. How will this move fit into the Carlyle chess board?

Carlyle co-founder, William Conway, hates a level playing field. It seems the board tilts further to his PEU's advantage with the latest political hire. Execution is the key to the government industrial monstrosity.

Carlyle Short on Transparency is No Surprise

The Carlyle Group fell short relative to its British peers on transparent reporting. Dow Jones reported, "the firm does not give a breakdown of its own accounts, and -except for a handful of case studies- fails to provide details on turnover, profits, employees and management of its portfolio companies."

That sounds eerily familiar to another opaque report involving the politically connected private equity underwriter (PEU), the Bush White House Lessons Learned report on Hurricane Katrina. Frances Townsend crafted a similarly incomplete analysis. Except for a few hero stories, her tome failed to delineate responsibility for hospital patient evacuations from dead facilities. Nor did it assess how first responders performed.

This enabled the hospital with the largest number of patient deaths to get not one mention in the Bush analysis. LifeCare Hospital lost 24 patients from Katrina's sideswipe of New Orleans. The Carlyle Group closed on its purchase of LifeCare just weeks before landfall.

That's ancient history, however nonpublic. But reporting is on the front burner for foreign corporations listed on the New York Stock Exchange and for sovereign wealth funds (SWFs), foreign government owned investment corporations flush with your gas money profits.

Guess who's part owned by the largest sovereign wealth firm in the world? An Abu Dhabi investment company purchased 7.5% of Carlyle last fall.

That same PEU recently sent a representative to testify before Congress on SWF's. I imagine they said some nice things about their new part owner.

The federal government already proved it can be as opaque as the groups it purports to monitor. Layers of opaqueness grow when stacked upon each other. Trying to see through Abu Dhabi, Carlyle, and LifeCare produces little light. Why am I not surprised?

Bush's New Man in Dubai

The White House announced the nomination of Richard G. Olsen, Jr. for Ambassador to the United Arab Emirates. Richard is familiar with the region having served the State Department as Director of the Office of Iraq and Director of Office of Israel and Palestinian Affairs. Olsen volunteered to work with the Coalition Provisional Authority (CPA) as Governorate Coordinator for the Province of Najaf.

One could smell a cash theme in Richard's past and future assignment. The CPA acted very unlike their initials by handing out $12 billion in cash with virtually no record as to where it went. How much of that passed through Najaf during Olsen's time as Governorate Coordinator? However, that $12 billion looks like chump change to the Abu Dhabi Investment Authority, holding $875 billion in assets. Those greasy oil profits continue gushing in UAE government corporate accounts.

In a six degrees of Kevin Bacon connection, the Abu Dhabi Investment Authority purchased 7.5% of a politically connected private equity underwriter (PEU) with a Pennsylvania Avenue address. The Carlyle Group might sell another chunk to the richest SWF in the world.

Congress recently held hearings on foreign government owned corporations using your gas money to buy American companies and U.S. infrastructure. Carlyle hired enough Clinton White House staffers for this do nothing Congress to remain inert on the issue.

What's a citizen to do? Just be happy your gas money is making already insanely rich people even wealthier. Pretty soon they could take your toll money as well.

Access to Life Improving Scarce Resources

America's leaders face both an energy and health care crisis. Presidential hopeful John McCain wants to improve access to oil by allowing offshore drilling but has no plans to cover 47 million uninsured and 16 million underinsureds. A bipartisan group in Congress knows the pressure businesses face with that pesky health insurance benefit and is greasing the skids for employers to jettison their traditional responsibility.

Ron Wyden, D-Oregon, joined with his conservative friends across the aisle to shift health insurance responsibility to the employee. Unions would become relevant as the new group purchaser of health insurance. Andy Stern, President of the largest healthcare union, called emplyer sponsored health insurance "dead and not coming back." Businesses shifted retirement risk to employees over the last two decades and clearly wish to do the same with healthcare coverage.

My question to McCain, Wyden, and Stern is this: Now that we're responsible for our retirement and health care bills, when do we pick up the shovel and dig for fossil fuels in the back yard? Will that reduce or increase our risk of a heart attack?

I suggest citizens vote every incumbent out of office. It's the only chance to get the blues and reds out of oily corporate pockets. Do you trust Sen. Max Baucus, D-Montana, to reform healthcare to your advantage when he took campaign donations from eight for-profit healthcare companies with no facilities in his state? A pox on all their houses...