Sunday, August 13, 2017

Carlyle Cites PEU Paradox


Carlyle Group co-founder David Rubenstein shared in a recent earnings call:

"I think, final comment, what I’d call the paradox of private equity is that returns are coming down, prices are high. There’s a lot of dry powder by normal standards. So why are so many people giving so much money to people like us? Because they see everything else being less attractive
What has Carlyle done in the past to earn returns for investors?  It launched Carlyle Capital Corporation during an era of high prices and lots of dry powder.  Carlyle's website states:

When The Carlyle Group created Carlyle Capital Corporation in 2006, it was designed to provide attractive risk-adjusted returns for shareholders by investing in a diversified portfolio of fixed income assets consisting of U.S. government agency AAA-rated RMBS securities and leveraged finance assets. Due to the low-risk, low-return nature of the U.S. government agency-backed securities, a large position (and thus a correspondingly large amount of leverage) was required to realize gains substantial enough to warrant the investment. At the time, this approach was time tested in the market for these types of assets.  Unfortunately, extreme volatility and market movement during this liquidity crisis created a hostile environment for CCC and similar types of vehicles.
Carlyle promised to make back investor losses:

David Rubenstein, co-founder of the Carlyle Group, on Thursday pledged to compensate investors hit by the collapse of a $22bn mortgage-backed securities fund his private equity group floated seven months ago. “We have stood behind our products in the past and we are working on ways to address the losses that are being suffered by investors,” Mr Rubenstein told the Financial Times
One investor did not fill compensated for his CCC losses and chose another route for payback, bankrolling a lawsuit against Carlyle for its representations and actions regarding Carlyle Capital Corporation.

There are other paradoxes of private equity, some identified by the business media.  I'll offer:

1.  Pension funds invest in Carlyle, which has been known to dump employee pensions as part of its takeover strategy.
2.  Family offices invest in Carlyle, whose co-founder David Rubenstein refuses to leave an inheritance to his children to establish a family office.
3.  Preferred carried interest taxation continues despite ten years of overwhelming popular support for billionaires to pay a higher tax rate than their gardener or secretary. 
The PEU industry grew mightily from the last paradox.

At a Credit Suisse forum in Miami, in 2013, Rubenstein said of private equity, “Carried interest is really what the business has historically been about—producing distributions for your investors from good sales and I.P.O.s . . . and getting twenty per cent of the profits for yourself.” He went on, “That’s how we’ve really grown our business.” 
That's how Mr. Rubenstein likes it.  America's PEU sponsored politicians kept his wish to continue carried interest despite little to no public support.  That's my PEU paradox for the week.

Rogoff-Rubenstein's Alaska Dispatch News Files Bankruptcy


Alaska Dispatch News reported on its bankruptcy declaration:

Alaska's largest newspaper filed for Chapter 11 bankruptcy protection Saturday evening.

In a prepared statement Saturday, Alaska Dispatch News LLC owner Alice Rogoff, who also has served as publisher, said it was a "truly bittersweet" moment for her.
The filing is a Chapter 11 bankruptcy.  Bankruptcy filings are legal proceedings.  I was not aware Alaska courts are open on Saturday evenings.

It's not Alice Rogoff's first Alaska implosion.  Rogoff, wife of billionaire Carlyle Group co-founder David Rubenstein, couldn't save her Alaska House in New York City.  It closed in 2010.

A local buyer group has been identified and committed $1 million for ADN to pay its bills, many of them in arrears.  Buyers will operate the newspaper starting Monday morning.

Rogoff paid $34 million for the former Anchorage Daily News in 2014.  The reported purchase price is "up to $1 million."

The Rubenstein's have strong Alaska connections.  Rogoff hosted President Barack Obama for dinner in her Alaska home.  Two private equity underwriters attended the dinner, one from Guggenheim Partners and the other from Pt Capital.  The Carlyle Group manages Alaska Permanent Fund money and has an interest in Hilcorp Energy, which has a significant Alaska presence.

Two of Alice Rogoff-Rubenstein's Alaska pet projects sank for financial reasons.  Her husband knows when to stop throwing good money into a sinkhole.  Carlyle did that recently with nursing home giant ManorCare and refiner Philadelphia Energy Solutions. Carlyle has $50 billion in dry powder but won't put a penny more in PES.

Lenders clearly want to tie Mr. Rubenstein and his billions to ADN debts.  When the big money boys no longer trust one another to make good on their debts it's financial crisis time.  Will ADN's failure take us one step closer to that reality?

Friday, August 4, 2017

IPOs Opportunity for PEUnicorn Founders to Cash In?


Blue Apron expected to go public between $15 and $17 per share.  It went public at $10 and closed today at $5.83.  Bloomberg and other financial media ran reports of a 24% layoff but the job reductions are but part of the picture.  Blue Apron plans to open new fulfillment centers with more jobs than those lost.

The initial S-1 revealed Blue Apron's President has private equity underwriter PEU roots:

Matthew B. Salzberg, one of our founders, has served as our president, chief executive officer, and a director of Blue Apron since inception, and previously served as our treasurer until January 2017. Before co-founding Blue Apron, Mr. Salzberg was employed as a senior associate by Bessemer Venture Partners, a venture capital firm, from June 2010 to January 2012, and as an analyst by The Blackstone Group, a private equity firm, from June 2005 to June 2008.

In June 2014, we used a portion of the proceeds from the April 2014 Series C preferred stock financing to provide liquidity to Matthew B. Salzberg, Ilia M. Papas, and Matthew J. Wadiak, executive officers of our company, by repurchasing shares of common stock from them at a purchase price of $16.6586 per share.  Salzberg sold 150,073 share for proceeds of $2,500,006.

In October 2015, Matthew B. Salzberg, Ilia M. Papas, and Matthew J. Wadiak sold shares of common stock to unrelated investors at a purchase price of $13.3269 per share, which was equal to the common stock-equivalent price at which we issued and sold Series D preferred stock in May and July 2015.  Salzberg received $22,001,899 for his 1,650,939 shares.
Currently Mr. Salzberg owns over 47 million shares of Blue Apron.  Here's the breakdown:

Consists of (i) 25,154,605 shares of Class B common stock held of record by Mr. Salzberg, (ii) 19,744,091 shares of Class B common stock held of record by Family Trust Created Under Article V of the Matthew Salzberg 2014 Annuity Trust Agreement, for which Mr. Salzberg and his father serve as co-trustees, (iii) 2,500,000 shares of Class B common stock held of record by The Matthew Salzberg Family 2014 Trust, for which Mr. Salzberg serves as a trustee, (iv) 18,759 shares of Class B common stock held of record by Aspiration Growth Opportunities II GP, LLC, with respect to which Mr. Salzberg has shared investment and voting power and (v) 3,888 shares of Class B common stock subject to options exercisable within 60 days of April 30, 2017 of which 1,944 are vested as of such date. 
Salzberg got nearly $25 million for a small portion of his stock holdings prior to Blue Apron's going public.  His $25 million came from stock sales at prices well above today's close. It's a nice gig when an executive can sell his stock on the inside at a multiple of its current share value.

It's also cool when you can hire your brother:
Shaun Salzberg Design, LLC, which is owned by Shaun Salzberg, the brother of Matthew B. Salzberg, provides software design, implementation, and related services to us as an independent contractor. For these services, we pay hourly fees and reimburse specified expenses. These services were initially provided under a consulting agreement dated October 28, 2015 and, following expiration of the agreement on October 28, 2016, have continued to be provided on substantially the same terms. To date, we have paid Shaun Salzberg Design, LLC an aggregate of $149,550 pursuant to these arrangements. 
While Bloomberg got the employment story wrong this tidbit is enlighteing:

Our tri-class capital structure has the effect of concentrating voting control with our president and chief executive officer, Matthew B. Salzberg, and the other holders of Class B common stock. This structure will limit or preclude your ability to influence corporate matters, including a change of control, and might affect the market price of our Class A common stock. 
I bet Salzberg learned it from Blackstone.  It's a PEU world. 

Tuesday, August 1, 2017

Carlyle Won't Use Dry Powder for PES


The Carlyle Group invested $175 million in 2012 for for two-thirds of Philadelphia Energy Solutions (PES).  The deal received public subsidies and Carlyle did a liquidity recap, loaded PES with debt to siphon off dividends.  Reuters reported:

The refinery owners enjoyed a taxpayer-funded rescue package, which included the creation of a tax-friendly zone, $25 million in grants and environmental liability waivers. 

The company took on the $550 million loan that comes due early next year in 2013 to finish capital projects and pay out dividends to Carlyle and Sunoco. 

The payouts and tax advances reached $480.9 million between 2013 and 2015, according to filings.
Now Carlyle wants to restructure the company with someone else's money.  Insiders say Carlyle hired an investment bank to help tackle PES' debt burden.  

Carlyle has been a big investor in energy and has loads of dry powder but it will not throw good money after bad, especially for an investment that has already returned a multiple of its initial equity position.  

Public subsidy, debt for dividend, and preferred taxation are all common private equity underwriter (PEU)strategies.  Carlyle is skilled at executing the first two and keeping the latter.  Carried interest taxation remains soundly in place a decade after our PEU sponsored Congress first considered removing the billionaire tax break.  Mr. Rubenstein went to Capital Hill many times to keep his preferred taxation.  He got his way as politicians Red and Blue love PEU.

Saturday, July 29, 2017

Anthony Scaramucci's Skybridge: Fees in the Clouds


Brash Wall Street financier Anthony Scaramucci successfully translated Trumpish at the 2017 billionaire bash in Davos, Switzerland.  Scaramucci announced the sale of Skybridge Capital, his hedge fund of funds, while at the World Economic Forum meeting.  The price tag for China conglomerate HNA Group and RON Transatlantic EG dropped from a rumored $250 million to $180 million over the last six months as hedge fund withdrawals grew.  Bloomberg valued the deal at $200 to $230 million.

Scaramucci  received two appointments by President Donald Trump this summer.  His first was to the Export-Import Bank.

Financier Anthony Scaramucci, a prominent surrogate and fundraiser during President Donald Trump's campaign for the White House, has joined the embattled Export-Import Bank in a top position.

Scaramucci became a senior vice president and chief strategy officer at the agency on June 19.
His second appointment elevated Scaramucci to White House Communications Director.  Oddly he never occupied the Ex-Im Bank slot:

Scaramucci has been on unpaid leave from Ex-Im since the day he started there, June 19, a bank spokeswoman said, forgoing his $172,100 salary as chief strategy officer.
The Ex-Im job was essentially a special purpose vehicle (SPV) for Scaramucci to get to Washington.  Once installed in the White House Scarmucci went to work, employing his sales skills.  It turned out Scaramucci speaks Trumpish directly, as he did to the The New Yorker's Ryan Lizza.

Skybridge G II Fund's prospectus dated 1-30-2013 listed fees and expenses of over 10% per year, according to a SEC filing
The purpose of the table above is to assist prospective investors in understanding the various fees and expenses Shareholders are expected to bear directly or indirectly.
That's quite the prospectus showing fees at twice the rate of projected returns.  One's investment could be sucked away over time to pay Anthony Scaramucci and his staff.

In addition Scaramucci earned $200,000 in income from a majority stake in Hastings Capital Group, the principal underwriter for Skybridge's various investment vehicles. It's a form of double dipping, making multiple fees on a transaction.

Hastings Capital Group, LLC, an affiliate of the Adviser, serves as the Company’s Principal Underwriter with authority to sell Shares directly and to appoint Placement Agents to assist the Principal Underwriter in selling Shares.

The Adviser or its affiliates, including the Principal Underwriter, may pay from their own resources compensation to the Placement Agents in connection with placement of Shares or servicing of investors. Prospective investors also should be aware that these payments could create incentives on the part of the Placement Agents to more positively consider the Company relative to investment funds not making payments of this nature or making smaller such payments. 
It's difficult to tell how much Scaramucci will make from the delayed sale of Skybridge Capital as a "principal of the investment advisor."  It will be enough for him to dive into politics without financial worry.  The Blue team's Rahm Emanuel made big money between public service stints.

Chicago is the place where Rahm's personal financial house expanded greatly in terms of resources.  As an investment banker Emanuel made $18.5 million in two and a half years.  His political influence grew as a member of Congress and President Obama's Chief of Staff.   
How far might Anthony Scaramucci go in the Trump White House?  Will he make it to Trump's  #1 advisor once he has his core wealth locked up?  Scaramucci curses like Rahm and is also hyper-competitive.  Both share a potty mouth.  They are but two sides of the same coin, greed and power.  Politicians Red and Blue love PEU.  Scaramucci is the latest appointment in Trump's D.C. swamp. 

Update 7-31-17:  After 10 days on the job the Trump White House dismissed Scaramucci as Communications Director.  

Wednesday, July 19, 2017

Alaska News Boiling Under the PEU Surface?

Disruption made big profits for The Carlyle Group when it correctly read market geography.  It cost Carlyle big when affiliates experienced unanticipated adverse conditions.  Lately Carlyle bet big on energy, trying to get access to undervalued energy assets.  Less than two years ago it struck a deal with Hilcorp Energy to invest in North America energy.  Carlyle's press release stated:

Hilcorp Energy Company ("Hilcorp"), a privately owned oil and gas exploration and development company based in Houston, Texas, today announced the establishment of a newly formed partnership, Hilcorp Energy Development, L.P. (the "Company"), which seeks to acquire, operate and develop onshore oil and natural gas properties and related assets in North America.  In conjunction with the establishment of the Company, the Carlyle Energy Mezzanine Opportunities Fund, L.P. and Carlyle Energy Mezzanine Opportunities Fund II, L.P. ("Carlyle"), funds controlled by The Carlyle Group, have entered into a definitive agreement to invest up to $1.24 billion in the newly formed partnership.
Fast forward to summer 2017 and Hilcorp Alaska is the only bidder for 14 tracts of potential energy assets under Alaska's Cook Inlet.

Hilcorp Alaska LLC, a unit of privately held Hilcorp Energy Co. and an emerging force in the Alaska oil and gas industry, spent over $3 million for exploration rights to 14 federal offshore leases covering about 76,615 acres in Cook Inlet.



It's also the developer of a pipeline that would run across Cook Inlet.

Hilcorp Alaska is moving ahead with its $75 million plan to transport oil across Cook Inlet by subsea pipeline and close a tank farm that is dangerously close to Redoubt Volcano, according to a permit application filed with the U.S. Army Corps of Engineers.
The company's Alaska operation has the following characteristics:

Hilcorp Alaska has over 500 employees, 90 percent of whom are Alaska residents. Alaska is our home. 
Hilcorp acquired its first Cook Inlet assets in 2011.
Earlier this year Hilcorp had a leaking gas line under Cook Inlet:
This line was previously used to transport oil and was converted to natural gas use a decade before Hilcorp acquired it in 2015.
Carlyle's joint venture with Hilcorp was incorporated on 10-16-2015.  It's not clear how Hilcorp Energy Development, L.P. has invested Carlyle's up to $1.24 billion and whether the partnership put any of that money to work in Alaska.

Carlyle co-founder David Rubenstein's wife Alice Rogoff Rubenstein owns Alaska Dispatch News, which reported a number of stories on Hilcorp.  None of them mentioned any potential conflicts of interest due to Rubenstein family investments..

Rogoff bought into Alaska news in 2014 and 2016 saw her commit to publishing a physical newspaper for fifteen years

The story deepens with reports from Alaskan blogger Craig Medred.  His report from July 3rd:

In Alaska, the state’s largest newspaper and by far largest news organization is teetering on the edge of financial disaster with losses reportedly running to several million dollars per year and owner Alice Rogoff now reported to have tried to shop the publication to at least four different corporations. As of yet, there have been no takers.
His June 26th piece offered details about ADN's financial distress:
Rumors circulating around Anchorage that the Alaska Dispatch News was no longer paying its bill have been given credence by a lawsuit filed by the newspaper’s newsprint provider.
Catalyst Paper went into an Anchorage court on June 22 asking for an order forcing Dispatch, which also does business as ADN.com, to pay its March and April paper bills.

Based in Richmond, British Columbia, Canada, Catalyst is the largest producer of newsprint on the West Coast. 

Its suit against the ADN follows another filed against Arctic Partners, Inc., the Tacoma, Wash., company which owns a building on Arctic Boulevard that Dispatch was renovating  as its new print plant and Alaska news headquarters.

Only last fall, the building was emblazoned with a banner proclaiming “Alaska Dispatch News – COMING SOON.” The banner is gone now, and Dispatch appears to have been locked out of the building housing its new press after running up a bill of approximately $1 million with M&M Wiring, an Anchorage electric contractor.
Should Alaska Dispatch News implode it would follow Rogoff's Alaska House in New York City.  It closed in the summer 2010 despite efforts to obtain private and public funding.

Rogoff-Rubenstein's plan to raise $1 million per year from Alaska Permanent Fund money managers mired in Wall Street's meltdown. Oddly, while her husband's personal finances recovered in 2009 and Carlyle monetized affiliates, donors remained hard to find.

Alice Rogoff-Rubenstein turned to the government, which did not deliver. Senator Murkowski failed to submit a $1.5 million federal earmark to fund operations. The Alaska State Legislature passed on a requested $600,000 appropriation.
Will Rogoff-Rubenstein once again seek public support from the state or feds for her pet project?  Her husband hates throwing good money after bad.  He cut off Alaska House.  Is Alaska Dispatch News next?

Update 8-1-17:  Must Read Alaska ran a story on the missing Mr. Rubenstein. 

Wednesday, July 12, 2017

Fed Nominee Quarles Profiting from Public Bank Subsidies a "Nothingburger"


Reuters reported how Fed Nominee Randall Quarles personally profited from public subsidies while working at The Carlyle Group, a politically connected private equity underwriter.  Carlyle's Boston Private received $150 million in TARP funding while the FDIC recapitalized BankUnited so four PEUs could make huge profits.

Those investments earned hundreds of millions of dollars for Carlyle, profits that would not have been possible without government support
Carlyle completed its highly profitable exit of BankUnited in March 2014.   Three months later Quarles left Carlyle to start The Cynosure Group.

"Profiting in the markets isn't a scarlet letter in this Congress."
Carlyle's profits came not from trading in public markets.   They came courtesy of public subsidies.  Quarles oversaw both investments while at Carlyle.  Carlyle exited Boston Private in July 2013.

Quarles will be President Trump's latest PEU appointment, capable of steering the Fed ship in a way that profits his former peers.  Once upon a time that might have been a concern.  Today it's a badge of honor for both the Red and Blue political teams (who jointly love PEU).

Update 7-16-17:  Denver Post raised concerns about Quarles appointment.