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.

CLOs, that own much of the leveraged bank loans, in 2012 will be ending their investment periods and selling their positions. This too makes it harder to re-finance debt. There were hopes Japanese banks would fund a CLO resurgence, but that is now not likely to happen as they instead finance the rebuilding of Tsunami-wrecked Northern Japan.

Barron’s in October 2011 provided a good analysis of junk bond funds, with one fund manager saying he did not believe that some PE-owned companies would survive.

Three of the biggest LBOs are on the edge, according to The Deal.com

Private equity owned companies too face refinancing risks in England.

Skype employee reveals how owner Silver Lake Partners made a fortune on the backs of scared employees, and would not share the wealth when it sold the business to Microsoft.

President Obama’s choice to be Commerce Secretary was most recently a KKR Senior Advisor.

In the Buyout of America, Duke Street’s Peter Taylor said no one would lose their jobs as result of the sale of hardware chain Focus. By June 2011, the chain was set to liquidate costing thousands of jobs and the Government to pick up pension costs.

Industry consultants say private equity firms need to change their way of thinking and focus on organically growing their companies, while admitting this has not been past practice. 

Pension research firm Cambridge Associates said US private equity funds as of Dec. 31, 2010 had $376 billion to invest. Cambridge said the overhang (much from funds raised in 2006 and 2007) remains too large for PE firms to invest before their funds (which have five years to spend money) expire, unless we see a replay of the 2005-08 boom years. It also reports leveraged buyouts in 2010 represented 10 percent of the dollar volume of all mergers, just above the historical average, and 25 percent of IPO dollar value.  

In July and August, banks and high-yield fund investors pulled back making it harder and more expensive to finance LBOs. The debt crisis in Greece, Italy and the prospect of America defaulting on its loans is impacting LBO lending.

PE firms also will have a hard time selling the companies they currently own at a profit, so they will likely continue to hold them.

Leon Black’s Apollo in May agreed to buy the parent of American Idol in a $500 million-plus deal.

Presently, the SEC is invetigating whether PE firm treat all their investors equally, and whether they are honest with valuations.

Good blog on how private equity firms impact B2B businesses.

Wasserstein & Co.’s Harry & David filed for bankruptcy in March 2011, but the private equity owner did fine. Not only did it have the company borrow money to issue it dividends in 2005 that made it a profit, but it later bought the company’s debt at a discount and now will repossess its own business when debt is converted into equity. Agriculture consultant Bill Eckart told me, ”Wall Street is a big part of Harry & David’s story and I don’t see anyone changing their behavior, and we’re all paying the price for it.”

Wasserstein & Co. followed the same path with Penton Media.

A few private equity firms including Wasserstein & Co. buy companies out of bankruptcy and then run them in the same destructive manner as when they manage a typical business. Case in point: Apollo Management bought aluminum maker Aleris which private equity firm TPG Capital drove into bankruptcy, and then within a year had Aleris borrow money to pay itself a dividend, putting it again in crippling debt.

Besides Harry & David, private equity owned restauraunt chain Sbarro’s in April filed for bankruptcy, and the Perkins & Marie Callender’s chain defaulted on its debt.

Asian private equity firms too have seen their companies acquired in leveraged buyouts collapse.

When private equity owned companies go bankrupt they often cut costs even more, at least until they are acquired out of bankruptcy, as is happening now at Tribune’s WPIX TV station where it eliminated the sports department.

New book is out about how Sam Zell bankrupted Tribune. Tribune employees, whose pension was used by Zell to buy Tribune, settled post-bankruptcy, for $32 million. A win, but not much justice.

John Ginsberg from the Pension Benefit Guaranty Corp. published a paper in spring 2011 calling for more clarity in laws regarding fraudulent transfers in leveraged buyouts, where the buyout itself puts the company at undue risk. He believes there is little incentive for private equity firms to consider the consequences of bankrupting pensions since pension holders have little legal recourse.

Fortune writes a good article on how the private equity owned Charlie Brown’s/Bugaboo restaurant chain filed for bankruptcy resulting in 2000 job losses, without the company informing its workers why the business collapsed (try too much debt and not enough investment).

The Wall Street Journal does a nice job revealing how New York City is finding that apartment complexes acquired in leveraged buyuots are in too much debt and cannot keep up with repairs. By fining them more, the City is trying to drive down their values so they are repurchased at more realistic prices.

Several of the biggest private equity firms rent space at 9 W. 57th Street though you will not find any of their names in the directory.

After delivering poor returns, some private equity firms are themselves starting to implode, including three groups that were once among the most respected in the industry, Elevation Partners, Candover Investments and Quadrangle. More PE firms are in run-off mode.

Historically, according to a thorough January EDHEC Business School report, about 10 percent of companies bought globally by PE firms go bankrupt. See more on this page under STUDIES.

A Delaware judge in February said a KKR-led private equity consortium won the auction to buy Del Monte Foods by ignoring the Company Board’s instructions and forcing competition out. The New York Times Deal Professor has a column describing how PE firms are back to their 1980s ways of manipulating public company auctions.

Recap of how much money private equity firms spent globally in 2010.

KKR led a group of investors that in April 2011 took advantage of the what were then flush debt markets and refinanced some of the debt in Energy Future Holdings, the biggest LBO of all time. Now, the company in exchange for paying a higher interest rate has extra time to pay its principal. Problem is there is still a cash crunch and analysts believe the company will have significant negative free cash flow in 2014.

Blackstone in December 2010 refinanced a similarly sized LBO, Equity Office Properties, by amending a debt agreement. EOP agreed to pay a slightly higher interest rate for reducing its principal and extending the maturity from 2012 until 2014.

Blackstone is saving its buyout of Hilton Hotels by greatly expanding its luxury hotel line including Waldorf-Astoria through licensing deals. Clever and makes sense.

Blackstone, meanwhile, is becoming a real estate giant now eyeing strip malls. In March, it led the $9.4 billion buyout of Centro Properties, the biggest LBO reached since 2007 when the recession took hold.

What were flush credit markets in 2010 and the first several months of 2011 also gave PE firms a chance to wreak more dividend destruction.

Private equity owned hospital operator HCA in November 2010 issued its third dividend of the year to its owners (it is not taking the money from surplus cash but borrowing money to pay its owners). The pace of dividends was similar to during the 2005-2007 period. Problem is private equity owned companies after cutting costs to pay debt associated with the initial LBOs have difficulty handling the strain of doing it all over again. For more, read Chapter Six: Plunder and Profit in the Buyout of America.

PE firms are searching for opportunities overseas.

The New York Times Deal Doctor in December 2010 wrote an article about the difficulties American PE firms have investing abroad including foreign regulatory hurdles, and how despite the hype they have not committed that much money.  

Australia in May 2011 upheld a court ruling forcing foreign private equity firms to pay local taxes when making profits off local businesses.

KKR and other private equity firms including Carlyle are making money by investing in fast-growing Chinese companies. In Agusut, KKR bought a minority stake in a Chinese wastewater treatment plant. Carlyle founder David Rubenstein in January even met China President Hu Jinatao. Carlyle’s companies though are often found to have accounting irregularities. 

Meanwhile, KKR is also lending money to Indian businesses.

TPG has had trouble gaining a foothold in Russia; while the Chinese Government in May 2011 trying gain a US foothold took an ownership stake in TPG.

In November 2010, Dallas Fed President Richard Fisher warned of an upcoming buyout bubble. He believes that artificially low interest rates cause mutual funds to chase yield and invest in high-yield funds which fuel the LBO market. His words were measured but his message was clear: private equity firms tighten operations and do not expand the workforce.

HCA went public in early March 2011 as the biggest PE-backed IPO ever. Read my story to see how Bain Capital made a fortune by sapping proceeds from its own investors. Meanwhile, there are a growing number of private equity buyouts of for-profit hospitals.

Private equity owned companies are expected to represent about half the money raised in 2011 IPOs.

Private equity firms are making a fortune from the BankUnited IPO because the FDIC has guaranteed to cover all losses, and is not sharing the upside. In fact, the Government is taking a big loss. Thankfully, the FDIC did not give away many more sizable banks to PE firms after this sale.

Ironically, now publicly traded Blackstone may soon be forced to reveal much more in its public filings as a result of a successful shareholder suit.

New York Times piece on how private equity firms recruit future stars.

Warren Foss, the former head of high-yield at Salomon Brothers believes “much of the leveraging of corporations by LBO shops has been disastrous for the country.”

Marketwatch’s David Weidner in a November 2 column suggests that Congress at a time it is considering cuts to social security, the military and Medicare should consider ending interest tax deductibility for loans taken to finance takeovers.

The Deal’s Vipal Monga in a 2010 year-end article details how private equity owned companies will need to start paying the $462 billion they borrowed from 2005-07 just when CLOs that had lent them more than half that money hit the end of their investment periods. With little new CLO issuance, he sees a potentially big refinancing problem.

Standard & Poor’s October 26,2010 published a report on the amount of US speculative grade debt coming due between 2011 and 2015. The main takeaways: 34 percent of the $1.1 trillion, $390 billion, comes due in 2013 and 2014; the main refinancing risk is CLO funds by that time will be at the end of their reinvestment period and new ones will likely not take their places. CLO funds currently hold almost half, about $180 billion, of that debt coming due. S&P says the debt should be manageable except for single B or below rated issuers. Those issuers represent roughly $250 billion of the $390 billion.

The New York Times March 15,2010 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.

Hedge fund manager Jason Mudrick in Dec. 2010 predicted that private equity owned companies would default on between $150 billion and $250 billion due by 2015.

Still, the PE industry is very well connected and is pushing back. Retiring Indiana Senator Evan Bayh in 2011 joined private equity firm Apollo.

House Minority Leader Nancy Pelosi seems to be a private equity booster, and has never supported raising taxes on them despite the House voting to end carried interest three times. Read the attached story to find out why.

The Congressional Oversight Panel in March 2010 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.

The PE lobbying group renamed itself the Private Equity Growth Capital Council as part of an industry-wide effort to remake themselves. In fact, PE controlled companies typically do not grow businesses, and  in 2009 represented half of the S&P rated non-financial companies that went bankrupt. The Council in Dec. hired House Republican Campaign Communications Director Ken Spain to help spread its deceptive message.

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.

KKR in a July 2010 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, mostly underfunded state pensions.

A major investor in Lincolnshire suing over the firm allegedly charging beyond 2 percent in management fees.

U.S. pensions that are grossly underfunded need the money they have invested in private equity to generate good returns. But this story shows that despite their claims of paper profits private equity firms have returned very little of the capital committed to them.

As a result, pensions cannot commit too much more money to private equity funds.

This April 2011 article shows one-third of private equity investors have at least temporarily stopped investing in PE funds.

KKR held an unusual meet and greet in October to get current investors excited about renewing. Word is KKR in its new fund will offer a preferred return for the first time, guaranteeing investors that it will not collect commissions until it receives an eight percent annual return. More PE firms than ever also signed up for a November speed-dating session with potential investors.

Incidentally, the Pension Benefit Guaranty Corp. that invests its money conservatively, largely in fixed income, did much better over the last five years than most public pensions which have more invested in public equities and from 2005-2010 increased their allocations to private equity.

Private equity firms may take advantage of an opportunity if banks soon are prevented from making risky loans and derivative trades by filling the vacuum. KKR in October 2010 hired nine proprietary traders from Goldman Sachs. Apollo earlier hired Goldman investment management co-head Marc Spilker and in 2010 paid him nearly $50 million.

Apollo head Leon Black in May 2011 said the firm is buying distressed loans in Europe.

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 mortgages from 2005 to 2008. Fortress in October was unsuccessful in buying GMAC’s Rescap mortgage business.

The Congressional Joint Committee on Taxation in April 2011 was putting together a report on leverage. Look for report on reforming Internal Revenue Code.

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.

A blog for the restaurant franchisee community does a great job showing how former Dunkin’ Brands CEO Jon Luther gave deceiving answers during the hearings (see the second and third parts of this posting).

New York times gives a good rundown of many academic private equity studies.

IMF in May recommends that governments stop rewarding corporations with tax breaks for borrowing money. They are very direct in saying  interest tax deductibility hurts economies. Unfortunately, no mention how interest tax deductibility makes leveraged buyouts profitable. Still, a step in the right direction.

Bloomberg writes a sharp anlysis about how US state pensions have unrealistic return expectations, and are reaching for yield by investing in private equity. US state pensions have increased their allocation to private equity from three percent in 2000 to 8.8 percent in 2010.

Law firm Schulte Roth studies leveraged buyouts of public companies made from Jan. 1, 2010 to June 30, 2011. Its focus are terms in the merger agreements and it is quite thorough. 

Debtwire published a compelling report on how many European private equity owned companies restructured their debt from 2008-2010. Key takeaways: 24 percent of companies between 2008 and 2010 that borrowed money in leveraged deals have already defaulted. Many German restructurings. Senior secured lenders more than half the time repossessed businesses in restructurings.  

The New York Times Deal Professor conducts a study showing how merger agreements with low termination fees leads to more instances where private equity firms break merger agreements.

A January 2011 EDHEC Business School Report examines 7500 global investments made over 40 years. Key takeaways: firms making simultaneous investments perform poorly. Investments held over longer periods of time (six years plus) perform much worse than those held for shorter periods perhaps explaining why PE-owned businesses listed on the public markets tend to underperform. Average gross return from companies acquired from 1973-95 is 26 percent; 96-2005 18 percent. Also, PE firms do best when buying German businesses, and worst when acquiring companies in developing countries.

This talk on private equity fees is quite revealing.

Leverage and cyclical industries (where earnings can fluctuate greatly from year to year) do not mix. A study of the 10 biggest leveraged buyouts of global media companies from 2005 through 2009 shows private equity firms are losing money, as of Sept. 30, 2010, in nine of the 10 buyouts.

Providence Equity Partners head Jonathan Nelson says private equity firms grow companies, yet his firm drove movie studio MGM into bankruptcy (and Univision is not faring that much better).

My former Daily Deal colleagues, and friends, David Carey and John Morris, wrote a book published in October on The Blackstone Group, The King of Capital. The book and their blog are worth reading, and provide a more positive take on the industry than my own.

They do say in the footnotes that my analysis of a World Economic Forum study showing private equity owned companies lay off more workers than their peers is misguided because I ignore the conclusion. That’s true. I just look at the unbiased facts. The World Economic Forum study, despite being written with a pro-PE slant,has great data on the industry including how many companies have been bought and how PE firms have exited them.

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.

Peter Morris in the report says, “Private equity is like an expensive new cancer drug that has been marketed with increasing success for 30 years. Yet neither regulators, nor politicians have taken the responsibility for assessing how well it works, or for ensuring that patients can judge clearly. That would be inconceivable in medicine; it should be unacceptable in finance too.”

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 2010 published an interesting report Debt and Deleveraging: The Global Credit Bubble and Its Economic Consequences that includes detailing the dangers of leveraged buyouts.

A revealing study on how PE owned businesses pay much less in taxes than their peers came out after I finished writing the book. A 2012 article covering the same ground.

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