Monday, May 29, 2017

Carlyle's Moroccan Refinery Losses to Turn to Ownership?

Dow Jones reported in November 2016:

A Carlyle Group LP hedge fund has lost the $400 million it invested last year in a Moroccan oil-refinery deal, according to a securities filing and people familiar with the matter.

The hedge fund, known as Vermillion, was to receive a share of revenue at the refinery, which ran into financial trouble and was seized by Moroccan authorities later in 2015, the people said. The refinery, known as Societe Anonyme Marocaine de l’Industrie du Raffinage, or Samir, was put into liquidation this year.

In a note in the Washington, D.C., private-equity firm’s quarterly filing last week, Carlyle said it believes $400 million in petroleum commodities were “misappropriated by third parties outside the U.S.” It didn’t identify the soured deal or name the third parties. The note, which hasn’t previously been reported on, refers to Samir, the people said.
The Carlyle Group sought insurance payment for its investment losses but Mitsui Sumitomo Insurance Underwriting denied the claim, claiming Carlyle's investment was in the form of credit, not insurable assets.  Carlyle is suing the insurance company, not the people who ran the refinery into the ditch.  Simultaneously, Carlyle is teaming with Glencore to buy the refinery and add it to their European energy portfolio.

SAMIR is a public, majority-owned subsidiary of Corral Morocco Holdings AB, which operates in Morocco. Corral Morocco Holdings AB is wholly owned by Corral Morocco Gas & Oil AB, which in turn is wholly owned by Moroncha Holdings Co. Limited (Cyprus).
 The Coral Group obtained 67.27% of SAMIR in 1997.  Reuter's reported:

A Moroccan court ruled last year that Samir should be liquidated despite attempts to restart production by the company, which was controlled by the Corral Petroleum Holdings group of Saudi billionaire Mohammed al-Amoudi.
The Carlyle Group is not suing a Saudi billionaire who stood at the top of the corporate structure that lost Carlyle's $400 million, nor is it suing the ex-Morgan Stanley Vice Chair of Corral and SAMIR.

Carlyle is also not suing SAMIR's CEO or any SAMIR board members for stealing their $400 million.

These four SAMIR executives and board members could be the unnamed third parties who misappropriated Carlyle's oil.  They are the people who threw up their hands after the value of their underlying assets dropped significantly.

The question is how they went down.  Did they pull a Jon Corzine who grabbed funds from MF Global clients to make good on his bad bets?  Was Carlyle's $400 million in oil just too available?

Did they roll up the carpet months after telling investors how solid things were, as Carlyle did with Carlyle Capital Corporation (CCC) or SemGroup?  Carlyle ran from CCC's stinking corpse after the highly leveraged residential mortgage backed securities fund imploded in March 2008.

Carlyle Capital said on Thursday it has defaulted on $16.6 billion of debt and was unable to reach a deal with lenders.
SemGroup's implosion from bad energy bets cast doubt on Carlyle's management prowess and oversight abilities..

Having failed investors before Carlyle should understand when financial shocks take down a company.  CCC liquidators sued Carlyle for "breach of fiduciary duty, breach of contract, gross negligence and unjust enrichment."  A Dutch billionaire is financially backing the CCC lawsuit against Carlyle.

Carlyle is not suing Sheik Mohamed Al Amoudi, worth an estimated $9.4 billion.  The global billionaire circle is relatively small and Carlyle's co-founders have numerous connections with the Sheik.  The year 2007 saw the Sheik discover $1 billion in gold in Ethiopia (March) and donate $20 million to the Clinton Foundation for HIV/AIDS treatment in Africa

The Carlyle Group hired the Clintons to speak at their annual limited partner investors meeting.  President Bill Clinton spoke in  2012, while Hillary received $200,000 for her 2013 talk at the same event.  Carlyle co-founder next interviewed Hillary in early 2014.  Apparently the Clintons learned from their time with Carlyle as their Foundation is a 50% owner of Fondo Acceso, a Colombia private equity underwriter  Imitation is the greatest form of flattery.

Carlyle started with Saudi oil money and would not risk alienating it.  What's $400 million among billionaires? The sting diminishes if Carlyle can get insurers to pay up or use the loss to strike a better purchase price for the SAMIR refinery?

Sunday, May 21, 2017

Blackstone's $100 Billion Infrastructure Plans Dovetail with Trump's

Forbes reported:

Private equity giant Blackstone Group is unveiling a $40 billion infrastructure fund with the gulf nation, which will primarily invest in the United States. Saudi Arabia will commit $20 billion to the Blackstone infrastructure fund and another $20 billion will be raised from other limited partners, readying cash that could lead to $100 billion in total infrastructure investments on a leveraged basis.
I'm sure the American public is comforted by the fact that our future tolls, air travel fees, water bills and other public services will help billionaires and the Saudis profit further.

Saudi Arabia's Public Investment Fund has agreed to commit $20 billion to the Blackstone infrastructure fund, which will be set up a permanent capital vehicle
Recall Saudi citizens flew home when everyone else in America couldn't take a plane after 9-11.  Those Saudi citizens were in Washington, D.C. for the annual Carlyle Group investors meeting.

The Carlyle Group is also interested in infrastructure.  COO Glenn Youngkin told CNBC:

Airports, right out of the box, is the No. 1 target area right now.  They are an understood commercial entity, and there are airports starting to move this way” already. 
Puerto Rico has the only commercial services airport operated under private management according to a Feb. 2016 Congressional report.

Chicago Mayor Rahm Emmanuel cancelled Midway Airport's planned privatization in 2013.  Emmanuel made his post Clinton White House fortune as an investment banker for Wasserstein, Perrella and Company.  Rahm made $18 million in two and a half years.  Emmanuel served Bruce Rauner of GTCR Golder Rauner, a Chicago based private equity underwriter (PEU), according to Dealbook

Instead of private equity, Mr. Rauner advised Mr. Emanuel to pursue investment banking, where his political experience might be more valuable in landing deals in regulated industries.
Mr. Emanuel called him back after starting at Wasserstein and asked if he could take over coverage of GTCR for his new employer.
Rauner is currently the Governor of Illinois.  Both Emmanuel and Rauner are in position to privatize public assets to their PEU peers.

President Trump not only appointed billionaire PEUs to key government posts, he is touring the world intent on giving them the opportunity to get richer.

The partnership comes as top executives, including Blackstone Chief Executive Officer Steve Schwarzman and KKR & Co. co-CEO Henry Kravis, descend on Riyadh for the inaugural Saudi-U.S. CEO Forum, a weekend of deal-making. The meetings, which have already yielded billions of dollars in deals between companies including oil giant Saudi Aramco and General Electric Co., are taking place as U.S. President Donald Trump visits the kingdom.

Infrastructure investing has gained renewed attention as Trump’s administration vows to direct more private money toward improving roads, bridges and airports. 
Trump's infrastructure plan involves more leverage than Blackstone's:

The president's budget proposal, expected to be unveiled next week, will include a call for $200 billion in federal funds over 10 years for infrastructure projects, according to Bloomberg, citing a senior Office of Management and Budget official.

The White House budget blueprint would also provide incentives for at least $800 billion of infrastructure investment by the private sector and state and local governments, the official said.
Private equity hates paying taxes.  We'll see how much Blackstone's $100 billion permanent capital vehicle pays, if anything in taxes.  We might have the Trump PEU infrastructure tax rebate.  If so, the little people will pay and some of that will go to a Saudi investment fund.  It's a flash back to 2007, only that deal was with a United Arab Emirates sovereign wealth fund. 

Carlyle to Lick Fingers on Lily O'Brien

While retailers implode across the globe The Carlyle Group is ready to monetize its investment in specialty chocolate maker Lily O'Brien's.  Irish Times reported:

The Post also reports that chocolate company Lily O’Brien’s is up for sale for €50 million. It says the business, which is majority owned by US-Irish joint venture Carlyle Cardinal Ireland, has hired IBI Corporate Finance to find a buyer. 
The Carlyle Group purchased a majority stake in Lily O'Brien's in January 2014.  BusinessIrish reported in December 2015.

A joint venture between US private equity group Carlyle and Dublin-based Cardinal Capital, Carlyle Cardinal Ireland, acquired a majority stake in Lily O'Brien's (around 80pc) last year for a rumoured €15m.

Asked what an expanded company would be like in five years, Mr Donnelly said he would like to see the business heading towards the "magic number" of €50m
Might Carlyle work their magic and get €50m sooner than planned?

Aside:  Carlyle had $185 billion in assets under management when it invested in Lily O'Brien's.  At last report AUM stood at $162 billion. 

Saturday, May 20, 2017

Healthcare Experts Fooled on ManorCare Ownership

In a sad sign of the times a respected media publication cannot decipher the complex legal and investment relationships for firms intent on making a fortune in healthcare.  Modern Healthcare could not get The Carlyle Group, a politically connected private equity underwriter, owns Manorcare, an owner and operator of nursing homes in the U.S.

Carlyle Partners V purchased the company in 2007 for $6.3 billion.  It later sold the nursing home buildings to HCP for $6.1 billion and entered into an agreement to lease them back.  HCP is a real estate investment trust.  Carlyle still owns HCR Manorcare, the operator of nursing homes   

There is a lawsuit against HCP by shareholders upset that HCP entered into a bad deal with Carlyle.  The Carlyle Group charges Manorcare annual management fees to direct corporate strategy and deal fees to undertake the $6.1 billion sale of nursing home real estate to HCP.

Between a decade of management fees, deal fees, special dividends/distributions and proceeds from the HCP sale Carlyle has already made money on ManorCare. 

Modern Healthcare erroneously reported:
Real estate investment trust HCP has been sued for allegedly hiding Medicare kickback allegations against its skilled-nursing provider ManorCare from investors.

In a proposed class action lawsuit filed in an Ohio federal court Monday, HCP shareholder Scott Weldon accused the Irvine, Calif.-based company of violating the Securities Exchange Act by hiding from investors that ManorCare, an HCP-acquired skilled nursing facility operator, was repeatedly accused of fraudulently billing Medicare for more than $6 billion.

Before it was acquired by HCP in 2011, ManorCare was sued three times for insurance fraud. The Department of Justice joined the suits in 2015 after it investigated the company. That information was not disclosed to shareholders, the suit alleges. 
ManorCare operates 281 skilled nursing facilities in 30 states..
The nursing home operator is owned by The Carlyle Group, not HCP.

HCP was effusive in their praise for the ManorCare real estate deal, calling it a high quality transaction with best in class management team.  That was before things went south.

HCP shareholders are suing because their company did not disclose or act on critical information in a major deal, which has since gone bad.

HCP tried to isolate the asset by spinning it off into a separate publicly traded vehicle.  It spun off the ManorCare facility portfolio into Quality Care Properties (QCP) in October 2016.

QCP's recent 10-Q cited ManorCare's getting a "going concern" qualification from public accountants.  It also stated:

On April 5, 2017, the Company entered into a forbearance agreement (the "Agreement") with HCR III and HCRMC (together, "HCR ManorCare"). Among other things, the Agreement requires HCR ManorCare to make cash rent payments of $32 million for each of April, May and June of 2017, with a deferral of payment of the additional $7.5 million per month otherwise due until the earlier of (i) July 5, 2017 and (ii) an early termination of the Agreement, with all deferred amounts becoming immediately due and payable upon an early termination. The Agreement also required HCR ManorCare to deliver its 2016 audited financial statements and auditor consent to QCP not later than April 10, 2017, which were received on April 10, 2017 and included a "going concern" exception for HCR ManorCare in the auditor opinion.

During the term of the Agreement, which will end on July 5, 2017, unless earlier terminated, QCP and HCR ManorCare intend to engage in good faith discussions concerning a long-term restructuring of the terms of the master lease, the guaranty of the master lease and certain other matters. To facilitate the exploration of restructuring alternatives, QCP also agreed to provide HCR ManorCare with a temporary secured extension of credit of up to $7 million per month during each of April, May and June of 2017 (up to $21 million in the aggregate), which would be due and payable in full not later than December 31, 2017, subject to acceleration upon certain events.

HCR ManorCare made the reduced cash rent payments of $32 million for each of April and May of 2017. HCR ManorCare borrowed $7 million for April 2017 under the temporary secured credit agreement.
Oddly, The Carlyle Group is never mentioned in articles about ManorCare's financial turmoil, nor is it identified as ManorCare's owner in QCP's SEC documents. Carlyle is skilled in keeping their good name

Wednesday, May 17, 2017

ManorCare to Renege on Lease?

Senior Housing News reported:

ManorCare management “plans to request a waiver from its lenders regarding expected areas of non-compliance with the terms of the credit agreement and to continue good faith discussions with the lessor concerning a long-term restructuring of the master lease.” 
Carlyle paid $6.3 billion for ManorCare in late 2007.  ManorCare sold its real estate for $6.1 billion in 2011, so one might think there would be plenty of cash to pay leases.  Not so. 

Earlier this month, QCP entered into a forbearance agreement with HCR III Healthcare, LLC and its parent company HCR ManorCare, Inc.

The Agreement also requires HCR ManorCare to deliver its 2016 audited financial statements and auditor consent to QCP not later than April 10, 2017, which is expected to include a "going concern" exception for HCR ManorCare in the auditor opinion. 
The question is what happened to the $6.1 billion. How much did Carlyle siphon off in special dividends and management fees during its ownership of ManorCare?

ManorCare's promised quality committee fell down on the job, given the company's quality problems.  That should have been no surprise if government officials looked at LifeCare Hospitals, another Carlyle Group affiliate.

WSJ reported last week Carlyle hired restructuring advisors for ManorCare.  Will bondholders try to claw back Carlyle's massive ManorCare withdrawals? 

Sunday, May 14, 2017

Will Jared Kushner's Cadre Holdings Thrive Over Time?

The Real Deal reported:

When filling out his government disclosure forms, Jared Kushner omitted a few things, including his stake in a real estate tech company and at least $1 billion in loans.

The president’s son-in-law and senior advisor didn’t disclose his stake in Cadre, a tech startup he co-founded with his brother and Ryan Williams in 2014, or loans totaling at least $1 billion from 20 different lenders to properties and companies co-owned by Kushner, the Wall Street Journal reported.  (5-2-2017)
New York Post reported:

Cadre is an online investment portal co-founded by CEO Ryan Williams, who has had stints at Blackstone and Goldman Sachs. Thrive Capital’s Joshua Kushner and his brother, real estate developer Jared Kushner, are backers and strategic advisers.
Business Insider reported:

Joshua Kushner is also the cofounder of health insurance startup Oscar and runs a startup investment firm, Thrive Capital. His brother Jared Kushner, who owns the New York Observer and runs his family's real estate business Kushner Properties, is the third Cadre co-founder.
Prior the election of father-in-law President Donald Trump Jared Kushner was General Partner of Thrive Capital,  a private equity underwriter (PEU).

Thrive Capital invested in Cadre's Series A financing of $18.3 million.

An attorney for Kushner noted that a revised version of his disclosure forms includes his stake in Cadre. According to the papers filed with the Financial Industry Regulatory Authority, Kushner holding company JCK Cadre LLC, owns 25 to 50 percent of Quadro Partners, Inc., which owns at least 75 percent of RealCadre LLC, which operates Cadre. 
The attorney omitted any stake Kushner might have in Cadre via Thrive Capital.

Residual stakes in private equity affiliates are potential conflicts of interest.  Obama Health Reformer Nancy-Ann Deparle never declared her residual stakes from CCMP Capital Partners, a :J.P. Morgan private equity underwriter.  Payouts came during her public service despite having disposed of "all conflicting assets."

Kushner's General Partner role with Thrive is more significant than Deparle's Managing Director position with CCMP.  How much does Jared hold in residual stakes for Thrive's many investments?

Kusher's attorney is Jamie Gorelick, who was personally enriched during a period of fraudulent Fannie Mae accounting and collaborated with the White House to minimize BP's liability for the Gulf Oil Spew.

Kushner has reduced his Cadre ownership stake to less than 25 percent, Kushner’s attorney Jamie Gorelick told the Journal.
Jame did risk management for BP and is now doing the same for Jared Kushner.  I'm sure she will be rewarded for her shepherding Jared.

Saturday, May 13, 2017

China Trade Deal to Fuel Carlyle Group's LNG Assets

U.S. Commerce Secretary Wilbur Ross announced a China trade deal that could benefit his fellow billionaire private equity underwriting (PEU) brethren.  Chicago Tribune reported:

The United States would also allow U.S. companies to ship liquefied natural gas to China as part of the bilateral agreement reached following President Donald Trump's meeting with Chinese President Xi Jinping in April.
The Carlyle Group has at least two affiliates in the LNG space.  4Gas had this to say on the company's website:

4Gas is the world’s only independent LNG-terminaling company with a global reach. Our objective is to establish a terminal network that will play a crucial role in fulfilling the increasing needs of countries and companies for access to natural gas and that will provide LNG producers access to multiple markets on a global scale. The company is developing terminals in continental Europe, North America and Asia.  
The day before the Trump administration announced the China-U.S. trade deal Carlyle had its own LNG newsPEHub reported Carlyle affiliate Neptune Energy will buy oil/gas assets from a French company:

The EPI business that would be acquired by Neptune includes significant North Sea operations in Norway, including operatorship of the Gjøa field, in the Netherlands where EPI is the #1 offshore operator and the UK, with operatorship of the recently commissioned Cygnus gas field, as well as onshore Germany, and the Jangkrik LNG project in Indonesia. In all, EPI operates some sixty producing oil and gas fields. It also includes the large Touat gas development underway in Algeria, where ENGIE would retain a substantial interest alongside Neptune. 
Law360 reported

“Engie remains a major gas player in Algeria through its LNG activity, and Engie’s experience in Algeria is considered key to bring the first gas to the Touat project.” 
Carlyle inked a deal on LNG assets in Southeast Asia the day before the Trump team opened doors into China.  That's timing!  Carlyle co-founder David Rubenstein should thank President Trump the next time they meet at Mar-a-Lago.
President Trump and Commerce Secretary Wilbur Ross want to help more than Carlyle's founding billionaires.  Trump Advisor Stephen Schwarzman can win as well.  Schwarzman's Blackstone Group is also in the LNG business.  Yes, under President Trump the rich can get much richer.

Update 5-17-17:  ZeroHedge ran an OilPrice piece on a coming LNG boom.

Update 5-21-17:  Alaskan LNG has historically been exported to Asia and Alaska Governor Bill Walker has big plans for LNG.  With BP, ConocoPhillips and ExxonMobil dropping out Walker needs a new developer for the $45 billion project.  Walker petitioned President Donald Trump for $40 billion in federal loan guarantees.  Will Carlyle enter the Alaska LNG picture and help Governor Walker and President Trump get a big infrastructure win?  Watch the news.  Chess pieces are being moved for LNG to boom in Alaska.

Monday, May 8, 2017

Red Team to Fold Up SEC's PEU Review

AltAssets reported:

The Financial Choice Act, a Republican proposal to reform the financial regulatory system, would see the SEC switch its “scarce resources” away from private equity in favour of protecting retail investors.

It states that “although private equity funds did not cause nor contribute to the financial crisis, Dodd-Frank imposes burdensome requirements on advisers to private equity funds, which unnecessarily punishes their investors and impedes job creation”.
At least one private equity investment contributed to the financial crisis.  Carlyle Capital Corporation (CCC) imploded in March 2008, six months before Lehman Brothers fell.  The Carlyle Group birthed and nurtured Carlyle Capital Corporation, a highly levered "safe" bet on mortgage backed securities.  Carlyle turned its back on CCC, claiming no role or responsibility for it's huge failure.

The burdensome requirement the SEC placed on private equity underwriters is that they charge their stated investment fees and no more.  SEC's Andrew Bowden talked tough on PEU fee dalliances but softened his stance under the prospect of private equity employment for his son.   

The Trump team wants to do one better than Obama's private equity regulator who kicked sand before running away.   Trump's Treasury wants to fold up the PEU review tent, no surprise since the President scattered private equity underwriters among his cabinet picks.

High leverage, poorly collatoralized loans and credit seizure can begin in any asset class and spread like wildfire.  Private equity is at higher risk for participating in the next crisis given deal multiples, the need to rollover affiliate deal financing at regular intervals and their wide freedom to value holdings at something other than mark to market. 

President Trump;s team can service his PEU friends but that doesn't make the world a safer place.  It returns us to conditions in place before September 2008.

Sunday, May 7, 2017

PEU Employs Millions of People (for Now)

Financial Review reported:

What are the biggest private sector employers in America today? If you toss that question to most voters or politicians they would probably point to some iconic corporate names: Walmart, say, General Electric, IBM or Citigroup.

But according to Michael Milken, the junk-bond-king-turned-philanthropist, the answers are mostly wrong. Mr Milken last week delivered a speech at the annual conference that bears his name, and produced a list of America's top 10 private sector employers.

Walmart tops this list. But the next eight - yes eight - largest employers, according to Milken data, are private equity groups
Private equity exploded during the Bush-Obama years.

The Carlyle Group and KKR, for example, are each estimated to employ about 700,000 people in their portfolio companies, which probably ranks them just below Walmart. 

Blackstone has "around 600,000" employees, as Steve Schwarzman, its founder, told the Milken event. 

Apollo, another private equity group, has 300,000 workers in its portfolio companies, and Warburg Pincus, General Atlantic and TPG are only slightly smaller

Lobby groups estimate that private equity firms now employ 11 million people inside America (the data are not very transparent).
Private equity underwriters (PEU) turned employment into a low wage, no raise, deteriorating benefit environment.  PEU Mavens like Carlyle co-founder David Rubenstein promote artificial intelligence as a way to reduce employment and further enrich the billionaire class.

Financial Review is clearly aware of private equity practices:

Is it time for voters and politicians to demand that private equity groups come out of the shadows and contribute more to public policy debates? Until now, they have generally refused to do so. That is partly because of a secretive culture, but also due to their ruthless focus on efficiency and profit; these are entities better known for cutting jobs, not talking about social cohesion.
PEUReport communicated with a former business reporter in 2011.  They wrote:

I have seen so many people -- particularly those in their 50s - 70s -- taken apart by what has happened in their industry as greed has hollowed out the economy. These are people took pride in their jobs and held themselves to this invisible standard that we all just took for granted, but is being wiped out.
The Carlyle Group scares me more than anything I've ever seen on Wall Street. It seems to exist to corrupt politicians and it's hard to know who they even represent.
The greed and leverage boys are now America's largest employers.  That's the Faustian bargain elected officials struck long ago.  Both Red and Blue White Houses proudly hosted PEU founders.  Congress kept PEU preferred taxation low for over a decade when a majority of Americans felt this practice unfair.

Private equity employs business practices that optimize sponsor profits, often at the direct expense of workers.  President Trump plans to enrich the billionaire boys further with super preferred pass through entity taxation.  They'll pocket whatever break Uncle Sam provides.

Workers will get the same raw deal they've had, crumbs at the foot of the PEU table. Since workers have crumbs might they want what's served on plates at the PEU partners' table?  Was Micheal Milken setting the stage for private equity to claim their right to invest on behalf of their millions of workers' 401(k) accounts?  If so, he's a good stooge.

Trump Team Can't See Fraud

Donald Trump appointed former Morgan Stanley Managing Director Craig S. Phillips to reform Fannie Mae and Freddie Mac, government sponsored entities charged with advancing home ownership.  Phillips headed Morgan Stanley's mortgage backed securities division as Global Head of Securitized Products.

Morgan Stanley ended up having to pay $625 million apiece to Fannie and Freddie to settle securities fraud charges in that case. 
In March 2007 Phillips founded Ptarmigan Capital, an opportunistic real estate private equity underwriter focused on India and the U.S.   In May 2008 BlackRock hired Phillips to head its Financial Markets Advisory Group.

In the past year alone, we have advised on or managed distressed portfolios totaling more than $150 billion, some of which have been highly publicized mandates. 
Craig Phillips helped create distressed portfolios during his securitized products term at Morgan Stanley.  BlackRock referred to Phillips:

"as a leader in the development of the securitized debt markets."
Is another crisis in the making and Phillips needed to shovel public money to cover the errors of his fraudster friends?

President Obama ditched fraud as something for the Justice Department to pursue, which left Phillips free for public service. 

Getting away with fraud is the badge of dishonor and apparently a useful skill to President Trump, who has trillions in federal money to steer to his billionaire friends.  He needs people who can funnel the money by any means.  Phillips knows how to shovel money into his and his friends pockets.  This is but the latest Trump appointment deepening the swamp. 

Interesting Aside:  Phillips will work with former Morgan Stanley Global Treasurer Celeste Brown, who was hired as Fannie Mae's Deputy Chief Financial Officer.  This smells like another once in a lifetime opportunity for Fannie Mae management.  I wonder how Craig's reform work intersected with Celeste Brown's decision to join Fannie. 

Saturday, May 6, 2017

Body Shop to Go PEU

Dame Anita Roddick started The Body Shop in 1976.  By the mid 1990's Roddick was well known as a maverick leader. Consider these Roddick quotes:

Over the past decade... while many businesses have pursued what I call 'business as usual,' I have been part of a different, smaller business movement, one that tried to put idealism back on the agenda.

Years ago nobody was elected on the economic ticket. It was either the education platform, or it was health or it was other issues. It is only recently that economic values have superceded every other human value.

I am still looking for the modern equivalent of those Quakers who ran successful businesses, made money because they offered honest products and treated their people decently... This business creed, sadly, seems long forgotten.

At The Body Shop we had always been measured by how many jobs we had created, and I got a major award from the Queen on that.

If I can't do something for the public good, what the hell am I doing?
L'Oreal purchased The Body Shop in 2006  and is ready to unload the company. Private equity underwriters (PEU) lined up to bid on The Body Shop.  Reuters reported Bain Capital, CVC, Advent and BC Partners intended to make an offer.

Anita Roddick died from a brain hemorrhage in 2007.  I imagine Dame Roddick in heaven appalled of the prospect of corporate flippers working their dastardly deeds on her company and its 22,000 employees. 

I believe in businesses where you engage in creative thinking, and where you form some of your deepest relationships. If it isn't about the production of the human spirit, we are in big trouble
Private equity crushes the human spirit, values money over people, and puts returns for billionaires over the public good.  There's big trouble ahead for a PEU owned Body Shop.

Thursday, April 27, 2017

Trump Tax PEU-palooza

President Domald Trump's PEU stacked White House did look out for its own in tax reform.  

Key point: Trump's plan would tax pass-through entities at 15%, whereas they currently are taxed at individual rates. This basically makes the carried interest debate irrelevant. 

Result: This is officially aimed at small businesses, but pass-through treatment also applies to a lot of hedge funds and real estate funds (e.g., ones structured as LLC's). Moreover, funds organized as limited partnerships likely would restructure to qualify as pass-through entities for tax purposes (or at least firms would be sure to raise the next one that way). In short, such fund managers could pay a flat 15% tax on all of their income, including annual management fees on which they currently pay individual rates. 
Apparently Trump and Mnuchin helped billionaire PEUs without mentioning their name or their preferred carried interest taxation.  It's a Trump PEU tax-palooza.  David Rubenstein and Stephen Schwarzman will be able to add to their personal billions with a Trump tax break!

Owners Sell PPD to Themselves

WilmingtonBiz reported:

Hellman & Friedman and Carlyle bought PPD in 2011 for about $3.6 billion and returned it to a privately held company.

The new deal, which values PPD at more than $9 billion, is expected to close in the second quarter of this year.

Hellman & Friedman and Carlyle will maintain joint ownership of PPD, with Hellman assuming majority ownership. Both will invest equity from new funds into the company, according to the release.
Monetize to self and bring in tertiary PEU owners.     The Abu Dhabi Investment Authority (ADIA) is part owner of The Carlyle Group.  Fortune reported:

GIC is a major limited partner in Hellman & Friedman.
Hellman Friedman invested with GIC in Universal Underwriters Group, Allfunds Bank, Multiplan
These are hardly arms length deals.  It's all in the PEU family.

This will not bring down healthcare costs.  Flipping health care companies for billions in profits helped ruin healthcare for the average citizen..  

Wednesday, April 26, 2017

Trump Tax Reform Impact on Carried Interest?

BusinessInsider reported on President Trump's tax reform plan:

An open question is what kind of treatment will be given to so-called carried interest. That allows managers to pay a tax rate as low as 20 percent, a loophole that Trump has railed against in the past. 
Government of and by the private equity underwriter (PEU) will be hard pressed not to advantage themselves yet again.

Tuesday, April 25, 2017

Sing of the PEU Times

Irish Times reported:

There are more than 3,000 US private equity firms. They manage about $825 billion in assets, up from $80 billion in 1996. Two of the largest companies – the Carlyle Group and KKR – each have more than 720,000 employees in their portfolio companies. 
While Carlyle and fellow private equity underwriters (PEU) grew tenfold worker pay stagnated and employers shifted cost and responsibility for healthcare and retirement to the employee.

PEU miserliness applies only to employees and taxes.  Affiliates are very generous with interest expense and grand payouts to executives and sponsors.

President Trump's tax plan is expected to be a PEU boon.

Commerce Secretary Wilbur Ross said that the combination of changes on taxes, trade and regulations being pushed by the administration would accelerate the pace of economic gains.
"There is no reason that we should not be able to hit that — if not beat it," Ross said at the White House news briefing.
Ross came from private equity to the White House, as did many other Trump PEU appointees.  It's billionaires looking after billionaires minted after 1980.

In 1980, there were only 24 private equity firms and deal volume only modestly exceeded $1 billion. 
PEUs grew from 24 to over 3,000.  Now every retired politician can be employed by one. Who needs a think tank or university?  Politicians Red and Blue love PEU.

Sunday, April 23, 2017

Trump's Tax Plan: Impact on PEU

PressTV reported:

"Big TAX REFORM AND TAX REDUCTION will be announced next Wednesday," the president announced in a tweet Saturday.

According to David Rubenstein, a co-founder of The Carlyle Group, Trump “will no doubt have some principles that he'll set forth soon and no doubt there'll be corporate tax cuts in those and repatriating money from offshore.”
It will be interesting to see the impact of President Trump's tax plan on private equity underwriters, especially as his administration is peppered with them.

Bloomberg reported in early March:

When it comes to the proposal to replace interest deductibility with immediate expensing -- a move that could meaningfully change the leveraged-buyout calculus -- the final result is likely to be more muted, said Rubenstein, who co-founded Washington-based Carlyle in 1987.
Just days to find out who President Trump serves.  Government by the PEU for the PEU.

Saturday, April 22, 2017

Troubled Carlyle Group Affiliate to Reform Scottish Social Security

The Carlyle Group purchased PA Consulting in December 2015.  The UK's Parliament released a report on an investigation of PA Consulting.  It found:

PA showed a serious lack of due care for its client in a number of ways: it failed to tell UKTI it was procuring the wrong thing; it failed to provide a full and clear explanation of its costs to UKTI when asked; and it described passing extra back-office costs to UKTI as being in UKTI’s interest. PA has told us it accepts it could have been better at communicating and providing explanations to UKTI. However, its inconsistent and unclear submissions and explanations, to us and the National Audit Office as well as to UKTI, seem to us to be more designed to obfuscate and confuse than to provide clarity

PA’s repeatedly inconsistent explanations are indicative of poor record keeping and a lack of corporate understanding of what happened. It beggars belief that this would have got through proper quality assurance and management review processes. We are also concerned that PA’s bonus scheme for its partners risks incentivising poor behaviour in the absence of proper controls. PA has acknowledged that the team negotiating with UKTI did not have the right skills to undertake a commercial negotiation or to make fair representations to UKTI. It has also acknowledged that the issues with the UKTI contract should have been escalated sooner internally. 
UK officials escalated these concerns such that the contract was cancelled in January 2016.  Interestingly, PA's CEO explained why they sold 51% of the firm to Carlyle:

1)  PA is net-asset valued so acquisition and growth by bolt-ons was not easy
2)  PA has a sizeable pension scheme looking after large numbers of folk expecting considerable creature comforts in their retirement. This reduces its agility. The money brought to the table by Carlyle has enabled Middleton to insist that the substantial number of PA shares still owned by former employees are cashed-in, which helps incentivise existing and future staff. 
3)  It gives PA favoured access to Carlyle’s 200 portfolio companies. A virtuous circle of Carlyle using one portfolio member to nurture others. 
4)  For a small, family-like organisation it was high time for some growth especially in the United States where PA has little traction. 
I'll add a fifth.  PA knew it needed more political gravitas and Carlyle provided.  Proof is PA Consulting has a new gig focused on modernizing Social Security for Scotland.  PA Consulting will "work on the development of a new trial Scottish social security system." 

Carlyle has long wanted a piece of social security and individual retirement accounts.

Five years ago, Carlyle Group's David Rubenstein predicted a future where ordinary savers would be able to invest in private equity, an industry limited to wealthy individuals and institutions.
PA wants growth in the US and President Trump recently floated eliminating the tax that funds Social Security.

In a parallel story consulting giant PwC helped the government of India select 75 cashless townships

To qualify as a less-cash townships, the conditions included the township must have completed deployment of a payment acceptance infrastructure, and all the families residing there would have to covered under training programmes. Also, more than 80 per cent of the total number of transactions must have been done through digital modes of payments during the review period.
Social Security and cash may soon be things of the past.   Governments and consultants will have conspired to make this happen.  Rest assured private equity is driving both and has plans to profit every step of the way.

Monday, April 17, 2017

Booz Allen Issues Debt to Pay Sponsor Carlyle

SeekingAlpha reported:

Booz Allen Hamilton Holding Corporation (NYSE:BAH) announced the launch of $350M aggregate principal amount of unsecured senior notes by its wholly-owned subsidiary, Booz Allen Hamilton Inc.
Funds will be used for multiple purposes, including:

"repayment of a portion or all of the outstanding deferred payment obligation established in connection with the acquisition of Booz Allen by The Carlyle Group in 2008."
SEC filings show the deferred payment obligation at $158 million when established on May 15, 2008.  On December 11, 2009 BAH took on debt to repay Carlyle $100.4 million, $78 million of the deferred payment obligation plus $22.4 million in accrued interest.   The current amount owed Carlyle under the DPO is $81.3 million.

Booz paid Carlyle a one time $20 million for investment banking, financial advisory and other services.  It also pays Carlyle $1 million per year in advisory fees.

PEU affiliates have the honor of paying, paying and paying sponsors.  Carlyle loves cash, especially when the PEU notices early seismic economic shutters.

Sunday, April 16, 2017

Trump's Potential PEU Fed Vice Chair

Reuter's reported:

The vacant Federal Reserve vice chairman's seat is a key regulatory role Director of the National Economic Council Gary Cohn and his colleagues on the economic team want to fill soon. Cohn has interviewed nearly two dozen candidates and has whittled the list down. Randal Quarles, a veteran of the George W. Bush administration is one of several candidates left, a source familiar with the process said.
In June 2003 Quarles spoke on Iraqi Reconstruction.   Ten years later an analysis of that effort showed:

Iraq Reconstruction Cost U.S. $60 Billion: Left Behind Corruption And Waste
Despite a $60 billion U.S effort to rebuild Iraq, life for most Iraqis has not improved significantly, according to a bitter and regretful retrospective by Iraqi officials and U.S. diplomats, military officers and politicians.
Randall Quarles left President George W. Bush's U.S. Treasury for The Carlyle Group where he served on their financial services team.  Carlyle made a fortune on BankUnited, which it obtained from the FDIC with billions in subsidies.  That sound strikingly familiar to IndyMac and Steven Mnuchin, Trump's current Treasury chief.

The potential Vice Chair of the Federal Reserve served under President George H. W. Bush.

During the Administration of President George H.W. Bush, Mr. Quarles also served at the Treasury; first as Special Assistant to the Secretary for Banking Legislation from 1991 to 1992 and as Deputy Assistant Secretary for Financial Institutions Policy from 1992 to 1993. In those roles, Mr. Quarles was a principal member of the Treasury's effort to design comprehensive reform of the laws governing bank capital markets activities.
Randall Quarles rotated from government to Carlyle, a politically connected private equity underwriter (PEU).  Bank capital markets imploded after Quarles left his Domestic Finance position with the W. Bush administration.  Carlyle's press release on Quarles hiring stated:

"Before joining Carlyle, Mr. Quarles was Under Secretary of the U.S. Treasury, where he led the Department's activities in financial sector and capital markets policy, including coordination of the President's Working Group on Financial Markets, development of administration policy on hedge funds and derivatives, regulatory reform of Fannie Mae and Freddie Mac, and proposing fundamental reform of the U.S. financial regulatory structure."
That's the junk that blew up in 2008.  Candidate Donald Trump wouldn't touch a guy like Quarles.  Will President Trump appoint another PEU to retain a system that rewards those with the most?

Buyout shops have seized on a performance enhancer that artificially jacks up results, according to many industry executives.The practice isn’t illegal, and is largely cosmetic, but it allows private equity firms to goose what’s known as their internal rate of return, or IRR.
Greed requires those with oversight to look the other way.  Quarles played a role in several government performance debacles.  I expect none of this to come up if he is nominated for Fed Vice Chair.

Update 4-17-16:  WSJ reported Quarles will be top financial regulator for Federal Reserve Bank.

Update 4-20-17:  The Intercept found this story.

Carlyle's Hilcorp Gets Conoco-Phillips Assets at Half Price

WSJ reported:

Conoco-Phillips to Exit San Juan Basin in $3 Billion Deal:  Houston-based company has been selling off assets to pay down debt and shore up its balance sheet.
Houston Business Journal added:

ConocoPhillips is selling the San Juan Basin assets to Hilcorp San Juan LP, a partnership between Houston-based Hilcorp Energy Co. and Washington, D.C.-based private equity firm The Carlyle Group.
The Carlyle Group loves to buy distressed assets and got a huge discount from Conoco-Phillips.  SeekingAlpha noticed:

Book value of the assets amounts to $5.9 billion, while the company received just half that amount. This is highly disappointing as the company actually obtained a 1.2 times book value multiple for the assets, which were recently sold in Canada.   
Private equity's strategy is buy cheap and sell high.  Conoco-Phillips can only do so many buy high-sell cheap deals and survive.  How did Carlyle and Hilcorp get so lucky?

In an odd twist U.S. Energy Secretary Rick Perry called for a study to evaluate "to what extent regulatory burdens, subsidies, and tax policies are responsible for forcing the premature retirement of baseload power plants.”  How many baseload power plants does Carlyle own?  Last summer Carlyle's Cogentrix asked the state of California to subsidize its natural gas power plants.  History shows Governor Rick Perry gave Carlyle Group affiliate Vought Aircraft Aviation $35 million for 3,000 new jobs.  After six years with a Texas sized jackpot, Vought hadn't added to their workforce.  Vought cut 35 Texas jobs as of its target performance date.  Perry bold face lied and called it a 29,377 job gain.  Rick Perry loves to steer public money to his PEU friends and they love getting it.

Update:  In another odd twist Alaska Dispatch News reported on several Hilcorp oil/gas spills in Alaska and Louisiana.   ADN is owned by Alice Rogoff Rubenstein, the wife of Carlyle Group co-founder David Rubenstein.  Those reports occurred before Hilcorp and Carlyle announced the San Juan Basin acquisition from Conoco-Phillips

Saturday, April 15, 2017

Carlyle's Upscale European Retailers

While American retailers slide into bankruptcy The Carlyle Group increased its bet on Italian fashion brand Twin Set--Simona Barbieri.  Carlyle bought the remaining 10% from Barbieri who will leave TwinSet's board and resign from her Creative Designer position.

Twinset is a key investment in the fashion and clothing sector at European level, combined with Golden Goose Deluxe Brand and Hunkemoller, following the (Carlyle's) previous investment in Moncler.--Marco De Benedetti
Payless Shoes serves customers with less disposable income.  Golden Goose serves the top 0.1%.  TwinSet markets its products as "accessible luxury."

As TwinSet's co-founder it would interesting to hear Simona Barbieri's take on private equity practices.  I'm sure she's experienced much since Carlyle bought 72% of the company in 2012, later upping ownership to 90%.  TwinSet took on additional debt to fund a Carlyle dividend in 2014.

It's likely Carlyle purchased her silence in addition to the final 10% stake.

Carlyle's Horbach Shares PEU History

Business Insider reported:

What is now a $2.5 trillion industry managing money on behalf of public pensions and the like started as a hodgepodge of so-called leveraged buyout firms, popularized in the 1980s.

Business Insider recently sat down with Sandra Horbach, the cohead of US buyouts at the $158 billion Carlyle Group, to get a sense of how the industry has changed.
She started with the roots of private equity underwriting (PEU):

When I started in the business back in 1987, there were two firms with $1 billion in capital: KKR and Forstmann Little & Co. 
Bain Capital started in 1984, Oak Hill in 1986 and Carlyle in 1987.  The 90's brought Apollo, TPG, Silver Lake and Cerberus.

Thirty years later, there are thousands of firms with billions in capital. So we've grown significantly as an industry in a very short period of time.

 When I joined Forstmann Little in 1987, right out of business school, it wasn't even an industry. We didn't call it private equity — it was leveraged buyouts. It was all about the love of finding great companies to work with and invest and help build. It wasn't about creating this mega industry that has since been created.
And that period overlaps with the rapid rise of income for the wealthy and income stagnation or decline for the average citizen.  Her love of finding companies to help build doesn't quite fit with
her confession (which goes against the PEU party line).

When I started in the business, there were a handful of small firms, five, 10 individuals basically looking for great opportunities to invest. Very little amounts of equity, a lot of leverage. And a lot of returns were created through financial engineering. The returns that you could realize back then were significant. You could realize five times, 10 times your money because you were putting smaller amounts of equity into the entire capital structure. 
Horbach confessed her love to "help build" was actually "financial engineering."  She knows high leverage places a company at significant risk for default should conditions change.  What was not mentioned in the BI interview?  The widespread practice of affiliates issuing debt to pay the PEU sponsor a massive dividend.

Horbach shared her "mistake", the implosion of Oriental Trading Company on Carlyle's watch. 

Horbach: "... two years into the investment we hit the great recession, and, simultaneously, the US postal office increased postage rates for catalogs"

BI:  Those two factors seem a bit unpredictable. One the crisis, two the post office.

Horbach: You're right. They were incredibly unpredictable.
Horse hockey to both BI and Horbach.  Carlyle's highly leveraged mortgage backed securities vehicle Carlyle Capital Corporation (CCC) entered bankruptcy in spectacular fashion in March 2008, a full six months before Lehman's failure.  I believe August 2007 occurred before September 2008.

... an email sent by (Carlyle co-founder William) Conway to CCC chief executive John Stromber on August 14, 2007—a month after CCC had gone public and as the mortgage bond market continued to spiral further out of control.

“Maybe,” Conway wrote, “panic is appropriate.”
Carlyle distanced itself from CCC after it imploded.  

As for Horbach's "unpredictable" assertion Carlyle knew things were going to hell when it asked part owner CalPERS for $681.3 million in capital calls in 2008. Who doesn't love a history rewrite?

Some historians would quibble and say the (LBO-PEU) industry's origins date back much further, though not in any stance like today. 
Private equity's tradition of out-sized rewards for the top go far back.  The Pharaoh ordered Jewish slaves to make the same number of bricks as before, but they had to gather their own straw.  (Exodus 5:7-8)  

Idealistic founding father Thomas Jefferson turned PEU in his later years. Smithsonian's article "Master of Monticello" stated this about Jefferson:

It had long been accepted that slaves could be seized for debt, but Jefferson turned this around when he used slaves as collateral for a very large loan taken out in 1796 from a Dutch banking house in order to rebuild Monticello.  He pioneered the monetizing of slaves, just as he pioneered the industrialization and diversification of slavery.
Thomas Jefferson levered slaves, which makes him a PEU forefather.  Greed is as old as human selfishness and insecurity.  Private equity is the master.  Returns and image are all that matter.