Sunday, October 15, 2017

Carlyligarchy


The Guardian ran a piece on oligarchy.  It illuminated how a small number of greedy, power seekers can distort a democracy in their favor.  The story used ancient Greece but their practices brought to mind The Carlyle Group, a politically connected private equity underwriter (PEU).

At its core, oligarchy involves concentrating economic power and using it for political purposes. Democracy is vulnerable to oligarchy because democrats focus so much on guaranteeing political equality that they overlook the indirect threat that emerges from economic inequality.
Flashback to October 2001 in a piece titled "the Ex- Presidents' Club":
But what sets The Carlyle Group apart is the way it has exploited its political contacts. When Carlucci arrived there in 1989, he brought with him a phalanx of former subordinates from the CIA and the Pentagon, and an awareness of the scale of business a company like Carlyle could do in the corridors and steak-houses of Washington. In a decade and a half, the firm has been able to realise a 34% rate of return on its investments, and now claims to be the largest private equity firm in the world.
Carlyle managed $5 billion in assets in early 2001.  It manages over $170 billion today, a thirty four fold increase..

The next characteristic also brought Carlyle to mind:

They build a legal system that is skewed to work in their favor, so that their illegal behavior rarely gets punished. 
Carlyle settled a New York pay to play investigation for $20 million.

And they sustain all of this through a campaign finance and lobbying system that gives them undue influence over policy.
Private equity's preferred carried interest taxation is a perfect indicator of this undue influence. There has been no public will for billionaires to pay a lesser tax rate than a secretary, but that's been the case for over a decade.

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.”
Oligarchs remain in power by maximizing their public image.

"Instead of public works projects, dedicated in the name of the people, they relied on what we can think of as philanthropy to sustain their power. Oligarchs would fund the creation of a new building or the beautification of a public space. The result: the people would appreciate elite spending on those projects and the upper class would get their names memorialized for all time. After all, who could be against oligarchs who show such generosity?"
And that's exactly what Carlyle co-founder David Rubenstein did.  Alaskan journalist Craig Medred reported on one Rubenstein relationship, that with his wife Alice Rogoff Rubenstein:

Some friends and former friends of Rogoff are angry at Rubenstein, who they believe could have cleaned up his long-estranged wife’s Alaska mess but refused to do so. Rubenstein is worth an estimated $2.5 billion. He spent $21.3 million to buy the Magna Carta in 2007.

In 2016, Rubenstein gave the National Park Service $18.5 million to help restore the Lincoln Memorial. In private, Rogoff has described those acts as publicity grabs and claimed all her financier husband really cares about is making money.
Mrs. Rubenstein's revelation fits with Greek oligarchic practices.

"the key to oligarchy is that a set of elites have enough material resources to spend on securing their status and interests. He calls this “wealth defense,” and divides it into two categories. “Property defense” involves protecting existing property – in the old days, this meant building castles and walls, today it involves the rule of law. “Income defense” is about protecting earnings; these days, that means advocating for low taxes"
President Trump's cabinet is chock full of PEUs.  They are in a unique position to protect their brethren.
The question is whether democracy will emerge from oligarchic breakdown – or whether the oligarchs will just strengthen their grasp on the levers of government.
The Federal Reserve board already has two board members from The Carlyle Group.  One is Vice Chair for Regulatory Affairs and other could be the next Fed President.  Carlyle co-founders dined regularly with Presidents from both the Red and Blue Team.  They have free access to Capital Hill and show up when their pocketbook dictates.

Former Vice President Joe Biden's recent defense of rich people suggest the billionaire grasp on government will strengthen with each crisis.  Politicians Red and Blue love PEU.

Saturday, October 14, 2017

Carlyle PEUwear to Become Hip on Capital Hill?


Highsnobiety reported:

Just two days following the announcement that Supreme had sold a 50 percent stake in its company to The Carlyle Group, some branded tees have cropped up online. Available in the firm’s corporate colorway of white and blue, each tee is $30 and features the nondescript company logo on the front.
Step right up.  This is an opportunity for politicians to show their Carlyle love for a mere $30.

Wednesday, October 11, 2017

Fed Chair Candidate & Vice Chair for Supervision Worked for Carlyle


Federal Reserve Vice Chair for Supervision Randall Quarles worked for The Carlyle Group overseeing the PEU's financial/banking investments.  The new Fed Chair may have Carlyle on his resume.  Carlyle could have two alumni at the top of the Federal Reserve Bank Board of Governors.  What might that unleash for the greed and leverage boys?  Politicians Red and Blue love PEU.

Update 10-21-17:  A Carlyle alum as Fed Chair remains a distinct possibility.

Sunday, October 8, 2017

Retail Rush for Carlyle: History Suggests Otherwise

The Australian reported:

A growing number of retail investors are joining superannuation funds, sovereign wealth funds and high net worths in moving money into private equity funds, as the sector looks to deploy record levels of capital, according to one of the world’s top private equity executives. 
Carlyle courted retail investors before with little success.

In May 2015 Carlyle closed Carlyle Global Core Allocation Fund, a mutual fund with $50 million in net assets.   The fund had a mandate to invest across equities, debt, real estate, commodities and currencies using exchange-traded funds.  It also ceased Carlyle Enhanced Commodity Real Return Fund, which had a mandate to invest in assets like energy and metals. (source: Reuters)

Carlyle's hedge fund clients took a bath across many offerings.  Carlyle closed most of those offerings in 2016.

Carlyle Capital Corporation retail investors lost big in March 2008 when Carlyle put CCC into bankruptcy.  FT's headline read "Carlyle fails to save $22bn CCC fund."  A more accurate title would've been Carlyle drowns CCC in debt. 

Carlyle co-founder David Rubenstein called for a PEU retail investor boom that hasn't materialized over the last four years.  Given how many Americans have been taken apart by the greed and leverage boys I am not sure it ever will.

Saturday, October 7, 2017

Carlyle Invests in Skate Culture


New York downtown cool has a new sponsor, the Carlyle Group, a politically connected private equity underwriter (PEU). Business of Fashion reported:

The deal marks the first time a top-tier private equity firm has invested in streetwear and underscores the power of the Supreme brand — often dubbed “the Chanel of streetwear” — and its innovative business model, rooted in cool but accessibly-priced product.
Carlyle's investment will fuel rapid expansion.  How long before Supreme opens a store in Washington, D.C.?   When will we see the DBDs wearing skater-inflected cool?


Update 10-10-17:  Highsnobiety ran a scattershot piece on Carlyle-Supreme.   It mentioned Carlyle's ownership of Synagro but not the bribery case involving the wife of Rep. John Conyers or Synagro's bankruptcy.  It drew an analogy to Carlyle's investment in Beats. 

Sunday, October 1, 2017

Making Tax Reform Work for PEUs


House Speaker Paul Ryan visited Pennsylvania Machine Works to push tax reform.  The stated objective is to lower middle class taxes and corporate tax rates.  The framework proposes cutting the corporate tax rate from 35 percent to 20 percent  under the guise of growing American jobs.

Ryan ducked the carried interest taxation issue.  On Face the Nation he deferred it to the committee that will write the tax bill.  Carried interest taxation enables private equity underwriters (PEU) to pay a preferred, lower tax rate. 

Bloomberg list Penn Machine as a private company.   There is no evidence the company is private equity owned.

Foundry reported in May 2017 the sale of another Pennsylvania manufacturer similar to the plant Speaker Ryan visited:

Speyside Equity Fund I LP, a New York-based private-equity group, acquired Ashland Foundry and Machine Works Inc., a specialty steel foundry in eastern Pennsylvania. The foundry specializes in pump component and assemblies, for chemicals, mining, water, and industrial markets. The seller was Michael Bargani, an investor who also is listed as the owner of several other metalcasting businesses. The value of the purchase was not announced.. 

Speyside Equity is also the owner of Alcast Corp., Dalton Corp., Pacific Steel Castings, and Sawbrook Steel Castings. It has a range of other holdings in manufacturing, fabricating, specialty chemicals, and food ingredients businesses.
Owner Bargani purchased the plant in 2009 before flipping it to PEU Speyside Equity earlier this year.  Speyside's website states:

Speyside Equity is an operationally focused private equity firm that has been successfully investing in manufacturing-related businesses since 2005
A cut in corporate tax rates will increase corporate profits and enable PEU owners to siphon off more cash.  There's one major problem.  The PEU model is to load companies with debt which increase interest expense.  Interest is tax deductible, as are deal/management fees.  That means formerly tax paying corporations often don't owe taxes under PEU sponsorship.

Carried interest is the gift that enables billionaires to profit more when their PEU flips an affiliate.  It survived two runs in the last decade, thanks in part to Carlyle Group co-founder David Rubenstein and a complicit Congress.  Carlyle's 10-k (filed in May 2017) states:

We earn management fees pursuant to contractual arrangements with the investment funds that we manage and fees for transaction advisory and oversight services provided to portfolio companies of these funds. We also typically receive a performance fee from an investment fund, which may be either an incentive fee or a special residual allocation of income, which we refer to as a carried interest.
Carlyle achieved a net income of over $400 million in 2015.  It made a provision of $2.1 million for income taxes.  That's a tax rate of 0.52%.

President Trump, like President Obama before him, ran on eliminating the carried interest loophole.  Trump's team is waffling on his commitment.  President Obama made $400,000 from speaking to The Carlyle Group annual investor meeting.  Carlyle's founders have made hay off preferred carried interest taxation.

I expect Trump's tax reform will benefit the PEU boys, many of whom serve in his Cabinet.  The question is in how many ways?  Paul Ryan and Congress are expected to deliver yet again.  

Saturday, September 30, 2017

S&P Pushes Back Against PEU Unitholder Structure


While lenders kowtow to private equity underwriters (PEU) with low to no covenant debt one organization pushed back ever so slightly.  Barron's reported:

Most alternative managers have a dual-class or similar structure at the public entity level that confers limited or constrained voting rights on public holders, and S&P recently stated that they would no longer add companies with dual-class structures to their indices. This decreases the likelihood that alternative managers would be added to market-cap-weighted indexes such as the S&P 500.
The article added:

Alternative asset management firms such as Blackstone Group (BX), Carlyle Group (CG), and KKR (KKR) might consider converting to a C corporation status, which could make it easier for investors to own them.  
That might happen after founders cash in their billion dollar personal stakes.  PEU founding fathers won't give up control.  Amierica's dual class is exemplified in the world of finance. 

Monday, September 18, 2017

Carlyle Group LPs Treated to Yet Another U.S. President


President Obama continues to follow predecessor Bill Clinton's footsteps.  He spoke at the annual Carlyle Group Investor Meeting, the one reserved for limited partners (not lowly unitholders).  Obama's fee was nearly double Bill Clinton's.  The Carlyle talk was one of three that will make Obama over $1 million.

Obama ran as a populist then served the people he promised to hold accountable. He ran as a peace maker then made war after optional war. He said Hillary would continue his legacy and that's what scared many.

Ex-President Obama’s obscene speaking fees are from Wall Street and private equity underwriter LP events. This is what made the Blue Team like the Reds and turned many voters away from Hillary Clinton, who also spoke at Carlyle Group events.

Obama explained away his absurd payments by saying he will give $2 million to children's charities.  The logic is "it's OK to make the king's riches as long as the king is benevolent."  Carlyle Group co-founder David Rubenstein doles out his billions to historical charitable causes. Is Obama trying to imitate the most visible of his three Carlyle DBD hosts?

Obama would be wise to consider the perspective of Mrs. Rubenstein, with whom he dined during an Alaska visit as President.  An Alaska insider reported:

Rubenstein is worth an estimated $2.5 billion. He spent $21.3 million to buy the Magna Carta in 2007.   “He told reporters he was just a ‘temporary custodian’ of the historic piece of parchment. 

In 2016, Rubenstein gave the National Park Service $18.5 million to help restore the Lincoln Memorial.  In private, Alice Rogoff Rubenstein has described those acts as publicity grabs and claimed all her financier husband really cares about is making money. 
Crony capitalist birds of a feather flock together, especially at the Carlyle Group Annual Gathering of Limited Partners.  After 9-11 one of the first nonmilitary plane to hit U.S. airspace held attendees from Carlyle's investor meeting.  In 2014 Carlyle found it important to track LPs and their movements.

How might Brand Obama help a cash engorged Carlyle Group profit?  Obama made history, the PEU kind. 

Sunday, September 17, 2017

Pharma Patent Transfer to Native Tribes Latest Legal Scam

 NYT reported:

The drugmaker Allergan announced Friday that it had transferred its patents on a best-selling eye drug to the Saint Regis Mohawk Tribe in upstate New York — an unusual gambit to protect the drug from a patent dispute.

Under the deal, which involves the dry-eye drug Restasis, Allergan will pay the tribe $13.75 million. In exchange, the tribe will claim sovereign immunity as grounds to dismiss a patent challenge through a unit of the United States Patent and Trademark Office. The tribe will lease the patents back to Allergan, and will receive $15 million in annual royalties as long as the patents remain valid.
Allergan announced the deal in a press release.  This hearkens back to a time when corporations worked with Alaskan Natives to avoid taxes.  It became known as the Great Eskimo Tax Scam.

The Great Eskimo Tax Scam grew out of a brief, curious tax loophole that permitted Alaskan companies owned by Eskimos to sell their losses for hard cash to other American corporations. By offsetting the Eskimo losses against their gains, American corporations were able to avoid income taxes. All of a sudden there was a business in matching up profitable American corporations with Eskimos. (Carlyle Group co-founder David) Rubenstein and Norris spotted the window of opportunity and leapt through.
Since no one likes to pay taxes, finding the corporate buyers was easy. The trick was to flush out the loss-making Eskimos. Through a friend in Washington, Rubenstein plugged himself into a group in northern Alaska that had discovered a dubious technique for showing tax losses on idle property. (The Internal Revenue Service now challenges the validity of the Eskimos' accounting.) To persuade the Eskimos to deal with him, Rubenstein flew them to Washington and put them up in a fancy hotel on the condition that they listen to his pitch. In less than a year Rubenstein and Norris shuffled between $1 billion and $2 billion dollars of dubious Eskimo losses into profitable American companies, for which they took a 1 percent fee, or between $10 million and $20 million. "I wouldn't be surprised if they made more on that than they've made on everything else since," says a Carlyle associate. According to Rubenstein, "It gave me and some of the others here the confidence that we could compete in the investment world." Still, he only acknowledges his debt to the business of tax avoidance after the subject has been raised. 
It took Congress several years to close the Eskimo loophole.   How long will it take to close the sovereign immunity loophole for patent protection?  The dodge enables drugs to stay on patent, i.e. remain more expensive and hold off cheaper generic versions.

It's been ten years since Congress first attempted to eliminate preferred carried interest taxation for private equity underwriters, like Carlyle.  Congress hasn't done it despite overwhelming public support for billionaires to pay the same tax rate as their secretary.

Congress serves their funders.  Rarely do they serve the people.  I expect the Tribal Patent Protection Scam will live for quite a time.

Update 9-22-17:   The tribe filed for dismissal of the patent lawsuit. 

Saturday, September 16, 2017

Toys "R" Us: A PEU Return?


Bloomberg reported:

Some suppliers to Toys “R” Us Inc. have scaled back shipments to the retailer as it struggles to refinance debt and avoid a potential bankruptcy filing, according to people with knowledge of the matter.

The vendors are balking as Toys “R” Us continues talks with lenders over a new loan that would allow the company to stay open while it works out a recovery plan through bankruptcy proceedings, said the people, who asked not to be identified because discussions are private. The loan is being marketed by Lazard Ltd. to banks and existing creditors, said one of the people. 
Bain Capital owns Toys "R" Us alongside fellow private equity underwriter (PEU) KKR:

Toys “R” Us has vexed private equity owners Bain Capital, KKR & Co. and Vornado Realty Trust, which loaded the retailer with debt in a $7.5 billion buyout more than a decade ago. 

As doubts about the company’s health mounted, the cost for debtholders to insure against a default by Toys “R” Us surged in the past week to levels that imply a more than 60 percent chance it won’t meet its obligations in the next year. Credit-default swaps expiring in June were trading at 36 percentage points upfront, or $3.6 million for every $10 million of debt insured, according to data provider CMA. That’s up from $300,000 per $10 million at the start of the month.
Toys "R" Us bonds fell to 43 cents on the dollar on Friday.  CDS coverage rose to $4.6 million for every $10 million of debt insured.

Bain, KKR and Vornado won't throw good money after bad.  They are shopping for "a DIP loan to fund operations under chapter 11."  Will Toys "R" Us owners have gotten their money's worth from the company before they return it to debtholders?

Update 9-18-17:  Implosion is imminent.  Bloomberg reported "Credit default swaps expiring in December traded at more than 75 points upfront Monday. That means it would cost about $7.5 million to insure $10 million of Toys “R” Us debt.  Its 7.375 percent notes due 2018 traded for as little as 18 cents during Monday’s session."

Update 9-19-17:  Bain, KKR and Vornado returned Toys "R" Us to bondholders with its bankruptcy filing in Richmond, Virginia.  It's the second largest retail bankruptcy filing ever.

Tuesday, September 12, 2017

Vitamin World Files for Bankruptcy Post Carlyle


Former Carlyle affiliate Vitamin World declared bankruptcy according to CTPost

In a filing with the U.S. Bankruptcy Court for the District of Delaware, Holbrook, N.Y.-based Vitamin World blamed underperforming stores, above-market rents and unspecified disruptions in its base of suppliers.
Centre Lane Partner bought Vitamin World in February 2016 from Carlyle Group affiliate NBTY, also known as Nature's Bounty.   At the time of the sale the Carlyle team stated:

"With the shift of NBTY's focus in our US business to investing in and building our core brands, this sale of Vitamin World to Centre Lane Partners will ensure Vitamin World has the right investment and focus on its future as a stand-alone retail business." 
Centre Lane paid $25 million for Vitamin World

Vitamin World lists as its largest unsecured creditor The Nature’s Bounty Co., owed $21.5 million.
It's not clear how much of the amount owed is from the sale or from store inventory.  The bankruptcy filing shows the $21.5 million owed is debt from the sale plus trade.  The current obligation is 86% of the $25 million purchase price.  

In the Petition, Vitamin World reports $50 million to $100 million in assets and $10 million to $50 million in liabilities.  This statement does not fit with the filing document which shows a $125 million unsecured claim by 10th Lane Partners, LLC.  10th Lane is part of Centre Lane Partners.  Quinn Morgan heads both Centre Lane and 10th Lane.

Reuters reported last week the likelihood of a bankruptcy as a way to get out of leases on unprofitable stores.
I'll bet Vitamin World meets its $125 million financial commitment to its owners, Centre Lane and 10th Lane.

Update 9-13-17:  Store closures and renegotiating lower rent is the aim of the filing.

Sunday, September 10, 2017

Petraeus' "Biggest Gig Yet" is Peanuts for PEU Partner


Who knew being a board member of an affiliate beat out being partner of the owning private equity underwriter (PEU)?  That's the line KKR's David Petraeus wants the public to believe.  Reuters reported:

Former United States CIA Director David Petraeus said Thursday he has joined the board of a large cybersecurity company controlled by investment firm Kohlberg Kravis Roberts (KKR & Co. LP), taking his most prominent role in the private sector. 
That statement is blather.  KKR has nearly $150 billion in assets under management.

Petraeus, a KKR partner and head of its global risk assessment, said in an exclusive interview that he was joining Optiv Security because of the increasing importance of hacking threats. 
The private equity group KKR bought a dominant stake in Optiv this February. The company has about $2 billion in annual revenue and more than 1,000 employees.
News reports suggest KKR paid $1.8 to $1.9 billion for Optiv.  They bought the company to grow its government cybersecurity business:

wanting to expand Optiv’s commercial customer base beyond the 67 percent of the Fortune 500 that it currently serves and deeper into the government, where former general Petraeus pledged to help with his understanding of intelligence and military needs.  
KKR isn't the first PEU with such a vision.  The Carlyle Group invested in Coalfire in September 2016, doing so alongside The Chertoff Group.  Months later Coalfire acquired The Veris Group to:

become a major cybersecurity and threat assessment consultancy to federal agencies, businesses and cloud-computing service providers looking to do business with the federal government.
I find it interest private equity underwriters are happy to take government money but they become very concerned when their patriotic duty of paying taxes is raised.  Uncle Sam is to provide incremental revenue so PEUs can profit but that's all.  Billionaire PEUs retained preferred carried interest taxation for the last decade.  

Optiv's press release stated:

Now, with Gen. Petraeus as an advisor, we can step up our efforts and do even more for our country.
More for our country?  KKR could do more for our country by having founders Henry Kravis and George Roberts forego their preferred carried interest taxation.    That's not likely to happen.

Trump has hosted a steady stream of private equity executives since the election. Carlyle Group LP co-CEO David Rubenstein, Blackstone’s real estate head Jon Gray, KKR’s Henry Kravis and Cerberus Capital Management’s Steve Feinberg have been among his visitors.
Politicians Red and Blue love PEU, which is why carried interest lives on.

Saturday, September 9, 2017

Decade Long Canard: Taxing PEU Carried Interest as Income


Republicans and Democrats threatened for the last decade to tax private equity billionaires at the same rate as their secretaries.  The American public, long finding this practice abhorrent, stood ready for elected officials to eliminate this enrichment loophole.  Serious debate occurred in 2007 and 2010.  Candidates Barack Obama and Donald Trump promised they would address this inequity.  Obama didn't and the Trump administration is walking back its commitment.

There's something odd in this debate.  Private equity underwriters (PEU) more than doubled assets under management (AUM) over the last decade from just over $1 trillion in 2006 to nearly $2.5 trillion in mid 2016.  Despite an 115% growth in PEU AUM projected proceeds from changing the law fell 42%.  It dropped from $26 billion in 2006 to a current projection of $15 billion.  What?

This faulty math fits with Carlyle co-founder David Rubenstein's longstanding discount of changing tax law.   Flashback to Congress' last serious attempt in this arena when Rubenstein lobbied hard to retain private equity's preferred taxation.  The NewYorker reported:

On June 8th, (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 eighties. After a few minutes, Shapiro recalls, Rubenstein returned and said, “That was a senator. That one call just saved us on carried interest.
And it was a bipartisan save.  A major financial reporter wrote:

I watched a video interview of Rubenstein and his arrogance is really beyond tolerance. He was going on about the debt ceiling problem and how there would need to be cuts in services and higher taxes. When the reporter asked him about tax on carried interest he turned really disdainful and said that this "only" amounted to $22 billion over some number of years and this was not serious money. Boy, nothing like everybody doing their small part to save the country from oblivion!
Fifteen billion, that sounds like serious money even for Carlyle.  Washington Business Journal reported:

Private equity juggernaut The Carlyle Group (NASDAQ: CG) is looking to bust through the record for the biggest domestic buyout fund ever — and it's aiming for $15 billion, according to Bloomberg News.

If the D.C.-based firm is successful, it would be the biggest domestic buyout fund — larger funds have been raised for overseas buyouts — topping the $13.9 billion KKK & Co. fund raised in March.
Obviously, Mr. Rubenstein has different definitions for serious money.  His record on not wanting to pay taxes is long and clear.  He has spoken them to many politicians, most of whom call back.  In Washington D.C. money talks louder than the will of the people.

Wednesday, September 6, 2017

Carlyle Wins CCC Lawsuit Brought by Liquidators


Bloomberg reported a Guernsey Court ruled in favor of The Carlyle Group in a $1 billion lawsuit seeking damages for the Washington, D.C. based private equity underwriter (PEU).  The suit "alleged that the partnership and fund’s board of directors were negligent, grossly negligent or had willfully mismanaged the pool and breached certain fiduciary duties." The court did not buy that argument for Carlyle's operation of Carlyle Capital Corporation:

Carlyle Capital was a leveraged mortgage-bond fund formed in 2006 at the height of the real estate bubble. The pool met its demise in March 2008 when its mortgage-backed collateral plummeted and the fund defaulted on $16.6 billion in debt
Bloomberg did not state how highly Carlyle leveraged the fund (32x) or that the fund went public on Euronext in July 2007.    It also failed to note Guernsey's status as a tax haven.  Having a court side with losing investors or bankruptcy liquidators against a global tax dodger could harm new incorporations.  That would not do.

So the next time Carlyle comes calling with a highly leveraged fund based on bubble inflated assets know you don't stand a chance of getting your money back should it implode and Carlyle management will be held to no standard.

If you hear a sales pitch like this:

superior risk- adjusted returns from investments in a diversified portfolio of fixed income investments” that “expects to pay investors 90 per cent of its net income, have net returns of 14.1 per cent and a projected net dividend yield of 12.5 per cent
Beware.   The last group of suckers lost it all.

Saturday, September 2, 2017

PEU Carried Interest Thank You Letter


Dear Congress,

This Labor Day weekend we would like to thank you for not eliminating the "billionaire tax break" for the last ten years.  The public dislikes our paying taxes at a far cheaper rate than many citizens.  Sensational news reports have used secretaries and gardeners in their examples.

The first run at eliminating our preferred carried interest taxation came in 2007.  You kindly entertained Carlyle Group co-founder David Rubenstein, Blackstone's Stephen Schwarzman, KKR's Henry Kravis and  David Bonderman of TPG.  You received the message sent by twenty lobbying firms for which we spent $4.9 million.  Our case was and is:

Private 
Equity
Capital 
Knowldege is
Executed 
Responsibly
The next serious run at eliminating the loophole came in 2010.  Indiana Senator Evan Bayh went from protecting the billionaire tax to working for Leon Black's Apollo Global.  The public didn't know that many of you would retire from public service only to work for us.

Estimates for eliminating private equity's preferred taxation ranged from $25 to $27 billion over ten years.  Thanks to your inaction that money stayed in our pockets.  We put it to good use by giving our secretaries and gardeners an average wage increase of 1-2% per year over the period, raises that failed to keep up with inflation..

We appreciate your letting us buy a reprieve in 2007 that continues today.  Given the number of private equity underwriters (PEU) in President Trump's cabinet we trust you and the White House still have our backs.  In gratitude,

The PEU Boys (Summer 2017)

Sunday, August 20, 2017

KKR to Cash in on Arbor Pharmaceuticals


Reuters reported several Chines suitors are pursuing Arbor Pharmaceuticals. 

A potential deal could value Arbor at around $3 billion. New York-based KKR agreed to buy more than a quarter of shares in the company in December 2014, in a deal that valued privately held Arbor at over $1 billion, Reuters reported at the time. 
KKR did add Xenoport in 2016 for $467 million.

Buyout appetite from large pharmaceutical companies and private equity firms has pushed dealmaking in the healthcare sector to record levels this year.
For holding Arbor Pharmaceuticals less than three years KKR could make 200% gross profit.  That does not include any PEU management fees, dividend bleeding or deal fees.   I'm not sure my health care coverage is 200% worse than 2014 but it's darned close. 

A Chinese purchase should make U.S. consumers nervous, especially those who recall the deadly heparin outbreak in late 2007 and early 2008.  It came from toxic Chinese drug ingredients.

One Arbor employee advised management in June on Glassdoor:

The products ARE NOT GOOD. The supply chain is WORSE. The amount customers pay out of pocket IS HORRIFIC.
KKR will sell Arbor Pharmaceuticals but is buying WebMD for $2.8 billion.  As people can longer afford health they search the internet for information.  I'm not sure how PEU owned WebMD will change, but it won't be for the better. 

Friday, August 18, 2017

Jindal Latest Private Equity Underwriter

-

The Advocate reported:

“The firm is large enough to make an impact, and the people are high quality,” Jindal writes, per the Business Report. “I have enjoyed the private equity work I have done over the last several months, and am confident this platform will allow me to help portfolio companies accelerate their growth while also making a real impact in the changing health care environment.”

According to the report, Jindal expects to primarily work with the Ares Private Equity Group.

“Given my policy background at the federal and state levels, and private sector experience, I will naturally start with a strong focus in health care investments, but will also diversify over time to other areas where I can add value,” he writes.
My health insurance turned to junk the last decade as my plan shed benefit after benefit.  A pox on politicians getting big paydays from private equity underwriters (PEU), especially those making big money flipping for-profit healthcare companies.

Bobby Jindal is but the latest in a long line of profiting politicians, both Red and Blue.  America's uni-party loves PEU.

Reader Reaction 8-19-17:  "There are so many carcasses from all the pilfering that the only game is to join the vultures. Infrastructure will be the next carve up before the space cowboys seek subsidies to infinity. Thanks. The country has gone numb and dumb."  


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.

Update 10-4-17:  ZeroHedge wrote about PEU high prices and nearly $1 trillion in dry powder.  Lever up!

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?

Update 9-13-17:  Mrs. Rubenstein described her husband's patriotic philanthropy as "publicity grabs and claimed all her financier husband really cares about is making money."

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.

Monday, July 10, 2017

PEUs Behind Hamilton Hustle


The Hamilton Project's Advisory Board has benefited greatly from income inequality, something the group purports to reduce.

Launched in 2006 as an economic policy initiative at the Brookings Institution, The Hamilton Project is guided by an Advisory Council of academics, business leaders, and former public policy makers. The Project provides a platform for a broad range of leading economic thinkers to inject innovative and pragmatic policy options into the national debate.
The Hamilton Project "offer(s) a strikingly different vision from the economic policies that contributed to the alarming trends in rising income inequality and a mounting federal deficit."


Private equity underwriters (PEU) are in the top 0.1% and their wealth continues to rise dramatically.  PEU assets under management more than doubled since Bob Rubin founded The Hamilton Project at Brookings.


It's sad that all those pragmatic solutions rooted in evidence and experience failed to improve income inequality since the Hamilton Project's founding.

The Blue team's alignment with wealth and power ended up serving those already with wealth and power.  The greed/leverage boys on the Board of the Hamilton Project have to be grateful.