Here, we would like to keep you updated on some of the more recent private equity news, legislation regarding the industry and private equity studies.
Reporting to their investors private equity firms say at least six of the companies acquired in the 10 biggest buyouts are now worth less than they paid.
Private equity firms due to a tightening financing market are having a tough time beating trade buyers when competing to buy the same businesses. This played out in August in the auction for Hefty bag maker Pactiv.
The bankruptcy court examiner investigating the leveraged buyout of Tribune found executives lied about getting a Morgan Stanley opinion saying it could afford to borrow the money it did to finance the LBO. Even Morgan Stanley never considered it safe. The Chicago Sun-Times does a nice job detailing how these executives, and others, benefitted from the deal that rendered Tribune insolvent from the start.
The Wall Street Journal July 28 reported that in 35 percent of the leveraged buyouts this year private equity firms were buying companies from other private equity firms. This is potentially dangerous because these businesses are subject to buyout fatigue, when a company cuts costs to pay the loans it takes to finance a buyout, and then borrows the same amount of money again to finance another buyout and cannot take the strain. Simmons Mattress is a good example of a business that was stuffed with debt too many times. American Safety Razor that went bankrupt in July is another.
Henry Kravis’ KKR in July took a large step towards saving the biggest — and potentially most disastrous leveraged buyout of all time, Energy Future Holdings. Through a debt swap his firm is splitting the company’s assets so it can take money out of the better regulated side of the money-losing business while letting the rest of EFH, the unregulated side, collapse.
KKR in a July SEC filing revealed how much it makes annually from fees, after expenses: try $411,666 per employee. Three-quarters of that comes from management fees to its investors, mainly underfunded state pensions. Fees do not include the 20 percent commission it makes, carried interest, from buying and selling companies that was negligible last year.
The New York Times April 2 reported that America’s 10 biggest pensions paid private equity firms more than $17 billion in fees since 2000 without reaping good returns in exchange.
On July 1 I reported that private equity firms despite having $500 billion to spend and a limited time to spend it are showing some discipline when bidding for companies. The New York Times a few days earlier wrote a feature about how much money they have to spend.
The Sacramento Bee has a nice article detailing how Apollo Management’s placement agent allegedly gave a California Public Employees’ Retirement System trustee an all expenses paid private jet trip to New York to attend a Museum of Modern Art gala honoring Apollo’s Leon Black. After this trip, CalPERS committed billions to Apollo. In a separate article, the Los Angeles Time reports on CalPERS not being transparent about how it makes investment decisions with public money.
Private equity firms may take advantage of an opportunity if banks are prevented from making risky loans and derivative trades by expanding their operations and filling the vacuum.
Providence Equity Partners founder Jonathan Nelson making a May appearance on Charlie Rose said the private industry should be renamed “partner capital, growth capital” or “long-term growth capital” to better reflect its activities. Excuse me, 74 U.S. private equity controlled companies in 2009 went bankrupt. This represents roughly half of all the Standard & Poor’s rated U.S. non-financial companies that went bankrupt during the year.
Private equity greed has few limits. Terra Firma Capital’s Guy Hands is asking investors to bail out record label EMI, after he lost their money in the initial investment, and still wants a management fee. New York City’s Pension has said NO. After this article, Terra Firma received enough investor approval to keep EMI afloat.
Clear Channel, the country’s largest owner of radio stations, has too much buyout related debt causing it to squeeze its stations for cash. Also, its lenders seem intent on taking over the business.
The Capitol Weekly, the newspaper of California Government and politics, on April 1 pointed out that the nation’s two largest pension funds were in the state and might suffer big private equity losses. They quote from the Buyout of America.
I wrote a nice scoop March 18 about Blackstone President and long-time Republican donor Tony James planning a Democratic Congressional Committee fund-raising dinner at his home featuring keynote speaker Nancy Pelosi.
The New York Times March 15 wrote a cover story about how the massive amounts of money companies borrowed, often to finance LBOs, that matures from 2012-2015 will be hard to repay, and may lead to another credit crisis. They point out that much Government debt is maturing during the same time making it even less likely these companies will be able to refinance their loans.
What may stop future LBOs might not be Congress, but the Courts which are starting to question the legality of buyouts that leave companies insolvent from the start. In the bankruptcy of Tribune, some creditors are claiming that the banks should be forced to give back the $2 billion they collected from interest and fees. A court examiner in July 2010 though found there was likely not fraudulent conveyance in the initial buyout, and only shortly thereafter when the company borrowed a much smaller amount. Still there was this decision that got little media attention.
Score one for the activists! Actor Danny Glover rose awareness about how private equity firms treat workers. He wore a pin to the Oscars saying, “Don’t Wear Hugo Boss”. This was in response to private equity firm Permira announcing plans to close its Brooklyn, Ohio plant that employs 400 workers. Permira under significant pressure from its American investors to keep the plant open in April brokered an agreement with the unions in which jobs were maintained but hourly wages were cut from $12 to $10 an hour.
The Congressional Oversight Panel March 11 released a very critical report on Treasury’s bailout of auto finance company GMAC. It questions the systemic importance of GMAC, and why private equity firm Cerberus received preferential treatment. Readers of the Buyout of America know Cerberus Chairman –and former Treasury Secretary– John Snow may have influenced Treasury’s decision to invest $17.2 billion in GMAC.
US companies with below investment grade ratings used the same cheap credit that fueled the housing bubble to borrow almost $1 trillion during the credit boom. In some ways concerns about how they will pay these loans has increased over the last year despite the relative calm in the markets.
Moody’s in a February report said the percentage of the speculative grade companies that owe $800 billion by 2014 that now have a very speculative credit rating or worse has risen in one year from 62 to 67 percent.
“While certain conditions have eased over the past year, certain refunding risk still faces huge uncertainties over the next five years…How the markets avoid being overwhelmed by this onslaught of debt will depend on a number of factors in 2013-14 (when most of it matures) that cannot be predicted today, including the strength of the US economy, the prevailing interest rates of the day, and the credit markets’ appetite for speculative grade-debt.”
Expo Magazine that covers the trade show industry has a good feature showing how private equity firms infiltrated the sector buying some of the largest companies, and how many of them have now gone bankrupt.
A good local story about how the buyout of printer Vertis impacted the company and employees.
KKR’s First Data, the world’s biggest credit card processor, is laying off key executives and not replacing all of them as it struggles to pay its debt. One month after my story CEO Michael Capellas resigned. I would not be disappointed if my reporting played a role.
The White House should investigate the biggest buyout loophole: tax interest deductibility, the ability of companies to reduce the interest they spend on loans from taxes. Private equity firms benefit greatly from this law since their companies borrow the money needed to finance LBOs. PE-owned companies only pay about half the tax of other businesses. In the Buyout of America, we estimate PE-owned companies from 2000-2009 saved $70 billion from this tax break. One option is to eliminate the tax break when money is borrowed to finance an acquisition, and not when it is used to buy manufacturing equipment or to grow a business organically, which was the tax law’s intent. If significant changes are made to this tax law, it could end leveraged buyouts.
Kohlberg Kravis Roberts in July 2010 when filing to list its shares on the NYSE warned investors of risks, including the possibility of changes to interest tax deductibility. “Certain legislation has recently been adopted in Australia, Denmark, Germany, and Italy, among other countries, that limits the tax deductibility of interest expense incurred by companies in those countries.”
Separately, the European Commission is drafting the Investment Fund Managers Directive that would regulate the amount of money companies could borrow impacting leveraged buyouts.
Shortly before the credit crisis, the House held hearings on how private equity owned companies impacted their workers. It was not a serious effort, but gives readers a chance to see who was responsible for taking no action. Putting pressure on public officials can make a difference.
London think tank Centre for the Study of Financial Innovation released a study in July “Private equity, public loss?” that generated much publicity. The Center is not a left wing organization and is a promoter of free markets. I found the report very informative. Mostly, it focuses on how private equity firms make most of their money off of leverage and general economic growth. Also, there is discussion about how private equity internal rates of return are highly inflated.
My favorite passage, “Bracketing leveraged buyouts with Google (a venture capital start-up success) is like comparing a gas-guzzling sports utility vehicle with environmentally friendly car battery technology.” The report costs $50. Link to order above.
Here is the British Venture Capital Association’s response to the report. Very personal, as the Private Equity Council’s attacks against me have been.
FDIC Chair Sheila Bair in January testified before the FCIC that “corporate sector practices [have] had the effect of distorting of decision-making away from long-term profitability and stability and toward short-term gains with insufficient regards for risk.” Read the last three paragraphs to see the references to private equity and corporate behavior. She makes a good point too about the rising percentage of corporate profits generated by the financial sector, 34 percent in 2008.
A revealing study on how PE owned businesses pay much less in taxes than their peers came out after I finished writing the book.
The World Economic Forum wrote a very thorough study on private equity, and despite it being written with a pro-PE slant, much of the data is informative including how PE owned businesses fire more workers than comparable companies.
The Government commissioned a 2008 report on private equity. I found it worth reading although it did not attempt to break much new ground.
GAO-08-885, September 9, 2009
Few people realize that the top private equity firms, such as Blackstone Group, Carlyle Group, and Kohlberg Kravis Roberts, have become the nation’s largest employers through the businesses they own.
More...
Burger King is perfect example of how private equity firms can make money while hurting their business. McDs has gnd serious market share.07:49:37 AM September 03, 2010from web
Rattner in his book also fails to talk much about the gvmt's complete misread of creditors in the Delphi bailout07:47:40 AM September 03, 2010from web
Share Your Experience. Click here to read and post comments. Keep up with the latest news and follow the conversation. Click here for RSS feed.
Keep up with the latest news and follow the conversation. Click here for RSS feed.
PRIVATE EQUITY NEWS
NEWS | LEGISLATION | STUDIES
Here, we would like to keep you updated on some of the more recent private equity news, legislation regarding the industry and private equity studies.
Reporting to their investors private equity firms say at least six of the companies acquired in the 10 biggest buyouts are now worth less than they paid.
Private equity firms due to a tightening financing market are having a tough time beating trade buyers when competing to buy the same businesses. This played out in August in the auction for Hefty bag maker Pactiv.
Fortress Investment Group is trying to build a sub-prime lending business that is the biggest in the country. They have the right man to lead the effort: Daniel Mudd who led Fannie Mae when it bought too many sub-prime mortages from 2005 to 2008.
The bankruptcy court examiner investigating the leveraged buyout of Tribune found executives lied about getting a Morgan Stanley opinion saying it could afford to borrow the money it did to finance the LBO. Even Morgan Stanley never considered it safe. The Chicago Sun-Times does a nice job detailing how these executives, and others, benefitted from the deal that rendered Tribune insolvent from the start.
Banks in Europe are repossessing private equity owned companies that can’t pay their loans, including Samsonite luggage. They are setting up internal teams to manage these businesses.
The Wall Street Journal July 28 reported that in 35 percent of the leveraged buyouts this year private equity firms were buying companies from other private equity firms. This is potentially dangerous because these businesses are subject to buyout fatigue, when a company cuts costs to pay the loans it takes to finance a buyout, and then borrows the same amount of money again to finance another buyout and cannot take the strain. Simmons Mattress is a good example of a business that was stuffed with debt too many times. American Safety Razor that went bankrupt in July is another.
Henry Kravis’ KKR in July took a large step towards saving the biggest — and potentially most disastrous leveraged buyout of all time, Energy Future Holdings. Through a debt swap his firm is splitting the company’s assets so it can take money out of the better regulated side of the money-losing business while letting the rest of EFH, the unregulated side, collapse.
KKR in a July SEC filing revealed how much it makes annually from fees, after expenses: try $411,666 per employee. Three-quarters of that comes from management fees to its investors, mainly underfunded state pensions. Fees do not include the 20 percent commission it makes, carried interest, from buying and selling companies that was negligible last year.
The New York Times April 2 reported that America’s 10 biggest pensions paid private equity firms more than $17 billion in fees since 2000 without reaping good returns in exchange.
On July 1 I reported that private equity firms despite having $500 billion to spend and a limited time to spend it are showing some discipline when bidding for companies. The New York Times a few days earlier wrote a feature about how much money they have to spend.
Deutsche Bank departing co-investment banking head Michael Cohrs takes a parting shot at private equity firms, while DB goes back to making aggressive leveraged buyout loans.
The Sacramento Bee has a nice article detailing how Apollo Management’s placement agent allegedly gave a California Public Employees’ Retirement System trustee an all expenses paid private jet trip to New York to attend a Museum of Modern Art gala honoring Apollo’s Leon Black. After this trip, CalPERS committed billions to Apollo. In a separate article, the Los Angeles Time reports on CalPERS not being transparent about how it makes investment decisions with public money.
Private equity firms may take advantage of an opportunity if banks are prevented from making risky loans and derivative trades by expanding their operations and filling the vacuum.
Providence Equity Partners founder Jonathan Nelson making a May appearance on Charlie Rose said the private industry should be renamed “partner capital, growth capital” or “long-term growth capital” to better reflect its activities. Excuse me, 74 U.S. private equity controlled companies in 2009 went bankrupt. This represents roughly half of all the Standard & Poor’s rated U.S. non-financial companies that went bankrupt during the year.
Private equity greed has few limits. Terra Firma Capital’s Guy Hands is asking investors to bail out record label EMI, after he lost their money in the initial investment, and still wants a management fee. New York City’s Pension has said NO. After this article, Terra Firma received enough investor approval to keep EMI afloat.
Clear Channel, the country’s largest owner of radio stations, has too much buyout related debt causing it to squeeze its stations for cash. Also, its lenders seem intent on taking over the business.
The Capitol Weekly, the newspaper of California Government and politics, on April 1 pointed out that the nation’s two largest pension funds were in the state and might suffer big private equity losses. They quote from the Buyout of America.
I wrote a nice scoop March 18 about Blackstone President and long-time Republican donor Tony James planning a Democratic Congressional Committee fund-raising dinner at his home featuring keynote speaker Nancy Pelosi.
The New York Times March 15 wrote a cover story about how the massive amounts of money companies borrowed, often to finance LBOs, that matures from 2012-2015 will be hard to repay, and may lead to another credit crisis. They point out that much Government debt is maturing during the same time making it even less likely these companies will be able to refinance their loans.
What may stop future LBOs might not be Congress, but the Courts which are starting to question the legality of buyouts that leave companies insolvent from the start. In the bankruptcy of Tribune, some creditors are claiming that the banks should be forced to give back the $2 billion they collected from interest and fees. A court examiner in July 2010 though found there was likely not fraudulent conveyance in the initial buyout, and only shortly thereafter when the company borrowed a much smaller amount. Still there was this decision that got little media attention.
Score one for the activists! Actor Danny Glover rose awareness about how private equity firms treat workers. He wore a pin to the Oscars saying, “Don’t Wear Hugo Boss”. This was in response to private equity firm Permira announcing plans to close its Brooklyn, Ohio plant that employs 400 workers. Permira under significant pressure from its American investors to keep the plant open in April brokered an agreement with the unions in which jobs were maintained but hourly wages were cut from $12 to $10 an hour.
The Congressional Oversight Panel March 11 released a very critical report on Treasury’s bailout of auto finance company GMAC. It questions the systemic importance of GMAC, and why private equity firm Cerberus received preferential treatment. Readers of the Buyout of America know Cerberus Chairman –and former Treasury Secretary– John Snow may have influenced Treasury’s decision to invest $17.2 billion in GMAC.
US companies with below investment grade ratings used the same cheap credit that fueled the housing bubble to borrow almost $1 trillion during the credit boom. In some ways concerns about how they will pay these loans has increased over the last year despite the relative calm in the markets.
Moody’s in a February report said the percentage of the speculative grade companies that owe $800 billion by 2014 that now have a very speculative credit rating or worse has risen in one year from 62 to 67 percent.
“While certain conditions have eased over the past year, certain refunding risk still faces huge uncertainties over the next five years…How the markets avoid being overwhelmed by this onslaught of debt will depend on a number of factors in 2013-14 (when most of it matures) that cannot be predicted today, including the strength of the US economy, the prevailing interest rates of the day, and the credit markets’ appetite for speculative grade-debt.”
Expo Magazine that covers the trade show industry has a good feature showing how private equity firms infiltrated the sector buying some of the largest companies, and how many of them have now gone bankrupt.
A good local story about how the buyout of printer Vertis impacted the company and employees.
KKR’s First Data, the world’s biggest credit card processor, is laying off key executives and not replacing all of them as it struggles to pay its debt. One month after my story CEO Michael Capellas resigned. I would not be disappointed if my reporting played a role.
The White House should investigate the biggest buyout loophole: tax interest deductibility, the ability of companies to reduce the interest they spend on loans from taxes. Private equity firms benefit greatly from this law since their companies borrow the money needed to finance LBOs. PE-owned companies only pay about half the tax of other businesses. In the Buyout of America, we estimate PE-owned companies from 2000-2009 saved $70 billion from this tax break. One option is to eliminate the tax break when money is borrowed to finance an acquisition, and not when it is used to buy manufacturing equipment or to grow a business organically, which was the tax law’s intent. If significant changes are made to this tax law, it could end leveraged buyouts.
Kohlberg Kravis Roberts in July 2010 when filing to list its shares on the NYSE warned investors of risks, including the possibility of changes to interest tax deductibility. “Certain legislation has recently been adopted in Australia, Denmark, Germany, and Italy, among other countries, that limits the tax deductibility of interest expense incurred by companies in those countries.”
Separately, the European Commission is drafting the Investment Fund Managers Directive that would regulate the amount of money companies could borrow impacting leveraged buyouts.
Shortly before the credit crisis, the House held hearings on how private equity owned companies impacted their workers. It was not a serious effort, but gives readers a chance to see who was responsible for taking no action. Putting pressure on public officials can make a difference.
Below are links to:
Senate Finance Committee members http://finance.senate.gov/sitepages/committee.htm
House Financial Services Committee members http://financialservices.house.gov/who.html
House Ways and Means Committee members http://waysandmeans.house.gov/members.asp
London think tank Centre for the Study of Financial Innovation released a study in July “Private equity, public loss?” that generated much publicity. The Center is not a left wing organization and is a promoter of free markets. I found the report very informative. Mostly, it focuses on how private equity firms make most of their money off of leverage and general economic growth. Also, there is discussion about how private equity internal rates of return are highly inflated.
My favorite passage, “Bracketing leveraged buyouts with Google (a venture capital start-up success) is like comparing a gas-guzzling sports utility vehicle with environmentally friendly car battery technology.” The report costs $50. Link to order above.
Here is the British Venture Capital Association’s response to the report. Very personal, as the Private Equity Council’s attacks against me have been.
FDIC Chair Sheila Bair in January testified before the FCIC that “corporate sector practices [have] had the effect of distorting of decision-making away from long-term profitability and stability and toward short-term gains with insufficient regards for risk.” Read the last three paragraphs to see the references to private equity and corporate behavior. She makes a good point too about the rising percentage of corporate profits generated by the financial sector, 34 percent in 2008.
Consulting firm McKinsey & Co. in January published an interesting report Debt and Deleveraging: The Global Credit Bubble and Its Economic Consequences that includes detailing the dangers of leveraged buyouts.
Moody’s Investors Service in November wrote an insightful study spelling out how private equity owned companies are hitting the debt wall.
“Current market conditions, while greatly improved over the past six months, could not support the magnitude of debt that must be refinanced over the next five years. So without a substantial improvement in the high-yield markets, many companies could have trouble refinancing their debt, and those that manage to do so may be forced to pay significantly higher interest rates, which may compromise their financial viability.”
A revealing study on how PE owned businesses pay much less in taxes than their peers came out after I finished writing the book.
The World Economic Forum wrote a very thorough study on private equity, and despite it being written with a pro-PE slant, much of the data is informative including how PE owned businesses fire more workers than comparable companies.
The Government commissioned a 2008 report on private equity. I found it worth reading although it did not attempt to break much new ground.
GAO-08-885, September 9, 2009