This site is intended to pick up where the Buyout of America book leaves off.
The topic of leveraged buyouts should be more timely as ever with the Presidential hopefuls speaking about American job losses. While some of it is due to trade agreements, more is likely due to the proliferation of leveraged buyouts and heavily indebted companies making cuts.
We would like this site to be a forum where we tell you what is presently going on with private equity companies and the private equity debate.
The tide seems to be turning against leveraged buyouts. Private equity firms through LBOs own companies employing roughly one of every 10 Americans in the private sector.
Former Republican Presidential hopeful Jeb Bush in September 2015 laid out his economic plan and it included closing off the lifeblood of leveraged buyouts! He wanted to end the ability of companies to take the interest they pay on loans off taxes.
“That deduction encourages business models dependent on heavy debt,” he said.
Private equity firms buy companies the way that homebuyers acquire houses. They make a down payment, say 25 percent, and finance the rest. The critical difference, though, is while homeowners pay the mortgages on their houses, the PE firms have the businesses they buy take out the loans, making them responsible for payment. The interest the companies pay on the loans comes off of taxes.
The Financial Times in June 2013 does an excellent study on how British companies bought in leveraged buyouts pay much less in taxes, 11 percent, than their peers, 20 percent. The G8 is concerned about the tax break, which is similar to the US laws on corporate debt.
Several key Republicans in the recent past have been open to limiting the loophole as part of corporate tax reform, including Senator Dan Coats and former Republican Vice Presidential Nominee (and present House Ways and Means Chairman) Paul Ryan
I explain in a video (clip is from the documentary CorporateFM) how private equity works, and why it does not make any sense. Also, I explain that ending interest tax deductibility in corporate takeovers would end destructive buyouts.
President Obama also unveiled plans to reform the tax code including reducing corporate interest tax deductibility.
In Winter and Spring 2016 falling oil prices and global stock markets made it hard for private equity firms to finance leveraged buyouts with junk bonds temporarily halting much buyout activity.
Andy Kessler argues in a March 29, 2015 Wall Street Journal op-ed that private equity’s glory days are over. He says tax reform proposed by Senator Marco Rubio could end corporate tax deductibility, and private equity firms are running out of companies to buy.
Meanwhile, there is also momentum for the less courageous move of ending the carried interest loophole that allows private equity fund managers to have their profits taxed as capital gains, and not ordinary income.
Seventy-five percent of Congress would vote to raise taxes on private equity firms if a vote were held today, said a well-placed DC source supportive of the PE industry.
Republican Presidential candidate Donald Trump is now even saying private equity barons get away with murder by paying low taxes. Hillary Clinton and Bernie Sanders say the same.
Republican House Ways and Means Chair David Camp in Feb. 2014 recommended ending carried interest so private equity giants pay their fair share, and government could use the proceeds to lower the overall corporate tax rate.
The President with an executive order can end carried interest, an influential tax expert argued in June 2014.
But, Treasury responded to me later that month saying it would not intervene. Former Treasury Secretary Tim Geithner even wrote Senator Sheldon Whitehouse in 2010 telling him as much (Geithner Letter to Sen Whitehouse (1)
The Private Equity Growth Council in this video says carried interest is fair. No mention of how private equity firms collect fees that cover their investments, and then some so they take no risk. Or how the CEOs at their companies run their businesses so they also provide limited sweat equity.
The FT reports in March 2016 that private equity barons are even increasingly borrowing the money they invest in their own funds, so they have very little skin in the game.
Our Government though is acting to reduce leverage in buyouts.
The Federal Reserve is telling the biggest banks they cannot fund leveraged buyouts if the target companies cannot pay back their bank loans in five to seven years.
The Wall Street Journal in March 2015 reports that private equity firms are feeling the pinch.
The Bank of England (the equivalent of our Fed) in a March 2013 quarterly report said “the amount and maturity profile of buyout debt could present risks to UK financial stability.” It goes further stating it will be important to monitor the use of debt in acquisitions. The Bank cites the Buyout of America in the report!
The biggest private equity firms are moving into new areas including lending forming a new shadow banking system.
Today the most active private equity-like firm is Brazilian based 3G Capital that now owns Anheuser-Busch, Heinz, Burger King and Kraft. The Warren Buffett backed firm does put companies in debt and makes very deep cuts to raise short-term profits. My May 2015 New York Post exclusive on 3G shows how a confidential McKinsey & Co. memo reveals that 3G puts its companies at risk.
Half of the ten companies that borrowed more than $10 billion from 2004-07 to finance mega-buyouts have defaulted, as of June 2014.
Moody’s in June 2014 published a report analyzing 188 companies 14 of the largest US private equity firms purchased from 2004-07. The results were not pretty. Twenty-eight percent had defaulted on their debt. Most were formerly healthy businesses.
Cerberus Capital Management is known for pushing companies into default.
The firm that bankrupted Chrysler, GMAC and military contractor IAP Worldwide is struggling to keep America’s biggest gunmaker Remington Outdoor from burning through its remaining cash. Not only has Cerberus borrowed too much money against the business, it has reduced the quality of its rifles making them less popular with hunters.
Teamsters President Jimmy Hoffa Jr. in April 2014 alleged in a blistering editorial that Cerberus looted the pensions of World Airways pilots. The bankrupt World Airways flies US troops to war zones.
The company bought in the biggest leveraged buyout of all time, Texas utility Energy Future Holdings, as of spring 2016 was still in bankruptcy. Energy Future helps transmit half the state’s electricity. The company is still operating. Now, the question is if electricity rates will rise as a result of the financial collapse.
Henry Kravis and George Roberts of KKR whom led this buyout must be feeling a sense of déjà vu: Their firm led the biggest buyout of the 1980s — a $30 billion acquisition of RJR Nabisco — much of which also ended up in bankruptcy.
A highly leveraged Energy Future was not able to build the new power capacity Texas needs to avoid blackouts. A new owner might. This bankruptcy could also mean the state is on the hook for mine restoration.
The Sierra Club in May 2012 sued EFH alleging that by its own admission it was violating the clean air act.
KKR, separately, is now providing water and wastewater for the City of Bayonne, New Jersey, and in Dec. 2014 reached a deal to provide the same services for the Borough of Middletown, Pennsylvania.
Meanwhile, KKR’s $7.2 billion buyout of driller Samson has collapsed as oil prices tumble. Samson, which can no longer afford to drill, announced in August 2015 it was filing for bankruptcy.
Apollo Global Management and TPG Capital owned Caesars Entertainment, America’s biggest casino chain, put its largest subsidiary in bankruptcy in January 2015.
Private Equity At Work, published in May 2014 by two economists finds private equity owned companies are twice as likely as public companies to file for bankruptcy. The authors also say workers at private equity owned companies see wages fall compared to peers.
Layoffs are also part of the story.
A Moody’s December 2011 report found the 40 biggest US LBOs in the 2006-08 period had revenue growth of four percent through June 30, 2011 compared to 14 percent for the broader universe of non-financial rated companies. But earnings kept pace with peers indicating “PE firms may have been more aggressive in reducing costs.”
Regulators are starting to get tougher on private equity firms.
The SEC in May 2014 said many private equity firms were not telling their investors, often state pensions, what fees they were being charged. “We have identified what we believe are violations of law or material weaknesses in controls over 50% of the time,” the SEC said.
Gretchen Morgenson of the New York Times in May 2014 writes a sharp column about the undisclosed fees private equity firms charge their companies hurting both their businesses and investors.
Wall Street Journal reports that Blackstone, Apollo, Carlyle and KKR collectively reported roughly $9 billion in management fees from their private-equity businesses between 2008 and the end of 2013, regulatory filings show. The amount compares with only $12.2 billion in “carried interest,” their 20 percent share of deal profits.
Professor Victor Fleischer in August 2015 writes that endowments pay private equity firms more in fees than they spend on education.
The Government Jan. 22, 2014 filed a lawsuit against Providence Equity Partners owned USIS for rushing through security checks, like the one the security provider conducted on Edward Snowden, to cut costs (USIS parent company Altegrity filed for bankruptcy in 2015). The book shows how private equity owned companies commonly reduce customer service to pay their onerous debts.
Uncle Sam too is investigating Providence owned for profit college Education Management Corp. for paying commissions to recruiters and not properly screening students.
Warburg Pincus in early 2014 hired Former US Treasury Secretary Tim Geithner as President. Five of the last nine US Treasury Secretaries have joined private equity. The reason: PE is where you make the most money.
Blackstone Group’s Anjan Mukherjee in March 2015 left the private equity firm to join the U.S. Treasury as a markets adviser.
A Nov. 2013 Columbia Business School study shows private equity firms, when factoring in fees and the costs of committing money years before it is spent, generate average returns (no better than the stock markets).
Harvard in Oct. 2013 said its private equity returns over 10 years were no better than public equities, making the asset class disappointing.
Sharp Pitch Book analysis of how private equity may still cause the Next Great Credit Crisis.
A RBS Citizens executive in this Sept. 2013 video at 3:00 says private equity firms own about 25 percent of Corporate America.
No wonder the Carlyle Group hosting its September 2013 annual investor meeting drew 2016 Democratic Presidential Candidate Hillary Clinton as the keynote speaker.
Carlyle’s political pull did not stop CNBC’s Jim Cramer in 2014 from questioning the value of private equity in an exchange with Carlyle Founder David Rubenstein. As usual, Rubenstein said private equity firms save troubled companies, which is factually inaccurate. They instead typically saddle healthy companies with burdensome loans.
British academics in June 2013 release convincing report showing that UK companies taken private in leveraged buyouts by private equity firms fare worse than their peers.
Here is quite a turn: Meg Whitman-led Hewlett-Packard reacting to Siver Lake Partners’ $24 billion buyout of Dell said Feb. 6, 2013, “Leveraged buyouts tend to leave existing customers and innovation at the curb.” She is a long-time friend of 2012 Republican Presidential Candidate and Bain Capital founder Mitt Romney.
Moody’s Investors Service found in June 2014 when studying companies owned by 14 of the biggest private equity firms that from 2010-13 the number of downgrades was greater than the number of upgrades. “The vast majority of these downgrades were due to sponsored companies failing to meet expectations for improving financial performance.” The increase mostly affected companies bought after the financial crisis.
A European labor leader at Davos 2013 tells CNBC’s Maria Bartiromo in a must-watch discussion that the world is suffering from a private equity mentality.
Designer Jimmy Choo’s co-founder, Tamara Mellon, in Oct. 2013 writes a book claiming private equity firms “are the sociopaths of investment banking.”
“They come in and raid – raid your bank account and take your accomplishments. It’s all about fattening the pig for the slaughter, with no care about the people or the product.”
Former Reagan Budget Director, and private equity investor, David Stockman writes a scathing Newsweek feature revealing that Mitt Romney did not make money by building businesses but instead from financial manipulation. He makes a convincing case.
Hilarious, and largely accurate, video on how private equity firms hurt small business owners.
I appeared on CNBC’s Squawk Box August 6, 2012 explaining why I believe private equity firms hurt the economy to Andrew Ross Sorkin.
The New York Times in August 2012 did great investigative reporting revealing how private equity owned HCA, the largest hospital chain in the country, put profits over patients to pay debt and performed unnecessary heart surgeries. A second story showed exactly how it boosted profits. That is consistent with what I found in my book when examining the private equity owned Iasis hospital chain. It is also similar to what ProPublica found in examining private equity owned dental chains. Texas in Jan. 2013 announced it wanted to take action to regulate dental chains. Then, Salon wrote an investigative story about how Bain owned CRC Health Group, the largest provider of residential troubled teen and drug recovery centers, neglects and abuses patients. Very scary pattern.
Meanwhile, Bain Capital in Summer 2013 bought the Government owned blood bank business in a privatization.
Private equity and health care shows the dangers of privatizing public sectors.
Private equity investor Leo Hinderey Jr. says an honest assessment of the private equity industry shows it has plenty of warts.
We ask you to send in reflections on your experiences with private equity owned companies, which will be shared with readers, and thoughts on the subject.
Portfolio published the paperback of the Buyout of America Nov. 30, 2010.
There are new updates throughout the book, which is more timely than ever with the public concerned about how Wall Street impacts Main Street.