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.
The contracts private equity firms have with their investors, often public pensions, are starting to become public for the first time. Naked Capitalism in May 2014 writes about what is sees as the Industry’s Snowden Moment.
KKR comes under fire in May 2014 for having its Capstone Consulting Unit charge its companies fees and not sharing it with fund investors.
Apollo Global Management, now a public company, is having a hard time holding on to partners as the three founders—Leon Black, Josh Harris and Marc Rowan—keep more of the profits not sharing much with other professionals.
Leveraged buyouts are coming to China.
Blackstone, meanwhile, is proving to be a slumlord when renting single family homes. Also, Blackstone is profiting from forcing a Spanish company into default (much like Goldman did with credit default swaps)
BusinessWeek writes great story in April 2013 about how private equity firms and Wall Street banks are buying companies that issue annuities, including Athene, and then making risky investments with the money, including moving money into their own funds. The Wall Street Journal’s take is mostly painting the private equity firms as saviors.
New York regulator Benjamin Lawsky has since put constraints on Athene.
Banks are selling their stakes in private equity funds. There was a time, pre-recession, when banks were starting to dominate the leveraged buyout space both through direct investments, and investments in other’s funds.
The companies responsible for the European horse meat scandal are owned by private equity firms. This New Statesman article suspects that cost-cutting might have went too far.
TPG Capital, meanwhile, is in the process of buying Australia’s biggest poultry farm.
US private equity induced meat scandals: Strategic Investment and Holdings owned Topps Meat when its burgers in 2007 were linked to one of the country’s biggest E.coli bacteria outbreaks, and Morgan Stanley Capital Partners owned Premium Standard Farms when pollution from manure run-off endangered surface water.
Pensions & Investments Magazine in April 2013 published a list of the 10 pensions who were the biggest private equity investors, and the 10 biggest private equity firms.
Banks including Goldman Sachs are reducing their commitments to private equity funds to comply with the Volcker rule. GS, as of March 2013, still had 17 percent of its tier one capital committed to PE and hedge funds. JPMorgan is selling its One Equity private equity arm.
Meanwhile, nearly 2,000 private equity firms in Oct. 2013 were trying to raise new funds before they ran out of money.
KKR and partner Weld North are investing heavily in educational software for under-performing poor kids in schools that do not have enough teachers.
Michael Dell in Sept. 2013 led a $24 billion management proposed buyout of his namesake company. The debt will make it hard to spend significantly on transformative acquisitions.
Bain & Co. in a very good 2012 annual report said private equity firms now in 45 percent of their deals are buying companies to combine with their existing companies. This way they can justify paying high purchase multiples.
The consulting firm suggests that private equity firms in this economy have to add some value to their companies. “Today, many PE firms cobble together 100-day plans, but often they are unfortunately just long lists of activities that amount to little more than having many hammers banging on lots of nails.”
Bloomberg story in Feb. 2013 details how some of the largest private equity firms are generating terrible returns, and thus, having trouble raising money.
There are more than $100 billion trapped in zombie funds, firms that have taken more than the required time to invest and are not planning on raising additional funds and are basically collecting unjust management fees, according to the Financial News.
The Wall Street Journal May 31, 2012 does some digging and reports on how some private equity firms still manage struggling funds that have gone beyond their 12-year lives. Some of these firms still charge investors management fees, and make it hard for them to exit.
Carlyle is lowering the bar and allowing minimum $50,000 investments from qualified individuals straight into its buyout funds.
The Economist in Feb. 2013 questions why limited partners still invest in private equity funds, citing mediocre returns and how private equity funds do not protect against swings in the market.
Robert Reich in April 2012 gives a good video illustration of how private equity works by describing leveraged buyouts.
The private equity industry lobbying group, in its response, talks about how private equity firms provide growth capital to help businesses. No mention of debt or how a leveraged buyout is structured.
A Private Equity Growth Council video in June 2012 features New Mountain Capital’s 2007 purchase of North Carolina company Inmar. New Mountain invested equity equal to about 60 percent of the $350 million purchase price. That is double the average in a buyout, making this an unusual deal from the start. I would still like to see a video showing a real classic leveraged buyout in which the business prospered after the private equity firm exited the company.
Oregon’s pension now has 30 percent of its fund in private equity. Bloomberg wrote a sharp Nov. 2013 story on how some public pensions, including Illionis’, are trying to get out of their private equity positions.
Carlyle Group in April 2012 filed to list its shares on the stock market. Read the comments to see how the public views private equity.
Vanity Fair in its August 2012 issue discloses how one-time private equity giant and Republican Presidential nominee Mitt Romney evaded taxes, and pushed tax laws to the point he might have broken them. The reporter, Nicholas Shaxson, quotes me speaking about how Bain brags about how it uses more leverage in its buyouts than other private equity firms.
Romney, like other private equity titans, bought overseas companies, stripped them dry and collected profits for mainly US investors without paying local taxes. Italy knows the score and the country’s residents are angry at Mitt.
A Los Angeles Times article does a very good job focusing on Bain Capital’s 10 biggest investments during Mitt Romney’s time at the firm. Four of those formerly profitable companies went bankrupt.
My February 2011 story in the New York Post revealed how Mitt Romney’s past made him a Working Class Zero.
Private equity firms, have been taking advantage of the hot US junk bond market, having their companies with strong enough earnings borrow more money to pay them dividends just like they did during the 2005-08 boom. This WSJ story from August 2013 details the trend and risks. Part of the motivation too is it is hard to list businesses on the stock exchanges, or to find buyers for them.
Dan Primack of Fortune, typically a private equity advocate, writes a strong editorial saying tax laws should be changed to discourage these dividends.
Clayton, Dubilier & Rice, whose head Don Gogel has recently defended the industry on television, was sued in June 2012 by water bottle Culligan’s dealers for sucking money out of the business in a dividend leaving it unable to pay its debt.
Private equity firms are taking dividends too out of businesses they own in Asia.
Some influential private equity investors are encouraging them to continue taking the dividends. Andrea Kramer of Hamilton Lane Advisors, which advises pensions, said at a September 2013 conference that she liked to see returns as soon as possible.
Leveraged lending has become easier because collateralized loan obligation funds have made an amazing comeback. These are funds with bundles of tens of loans sliced in different pieces sold to conservative investors who want a slightly better interest rate than treasuries. These funds of corporate loans are similar to the CDOs instrumental in the meltdown of the mortgage markets.
Blackstone is making four times its profits in British nursing home provider Southern Cross even though chain in July 2011 collapsed with landlords reposessing the homes. I like this Guardian editorial warning that without changes there will be more Southern Cross disasters. The head of a British firm that buys distressed debt, Jon Moulton, says anyone buying a nursing home should be prevented from making profits beyond a certain pre-set margin.
Southern Cross as of early October 2011 has been able to find buyers for 70 percent of its homes. The chain shut down at the end of the year.
Yet, Terra Firma April 30 announced it was buying British nursing home operator Four Seasons.
The Swedish government has put in new rules concerned about private equity ownership of nursing homes.
The Private Equity Growth Council lobbying group, on the other hand, has a video portraying Blackstone’s Vanguard Health (profiled in the Buyout of America) as a savior of the Detroit Health System. (I have not done enough reporting to verify the Detroit claims).
Bloomberg does a great job in May 2012 revealing how private equity owned dental management practices serving the poor are doing unnecessary dental work—on young kids.
U.S. private equity firms have found it hard to resell their businesses. They now own a record 6,107 companies, and have owned 2,000 of them for more than five years, according to a Grant Thornton 2011 mid-year study. Prequin in August 2012 releases a similar report.
Partners at private equity firms will not make “carried interest”, or commissions, on about 75 percent of the companies they own giving them little incentive to sell until the value of their companies rise, a Bain & Co. consultant said in March 2012.
Private equity owned companies listing shares sometimes agreed to transfer future tax benefits to their exiting private equity sponsors. This hurts the public companies going forward.
KKR has formed a partnership with the Chinese Development Bank.
Yet, the Chinese government in May 2012 set new rules making it harder for off-shore funds to invest in China.
A PE firm bought TruckPro. Then, it essentially collapsed. Now, another PE firm is buying it again. Private equity firms anticipate they will be buying and selling more companies to each other. Unfortunately, the biggest number of layoffs in private equity owned companies occurs after these ’secondary’ sales.
Bain Capital owned Clear Channel, the largest owner of radio stations, is continuing to fire local DJs. While its stations become more generic, Clear Channel has no positive cash flow and owes $18.9 billion.
Filmaker Kevin McKinney in 2012 released the documentary corporate.fm detailing how private equity firms, and others, have ruined radio by focusing on short-term profits.
The private equity giants are still living large.
TPG’s David Bonderman in November 2012 threw himself a 70th birthday party featuring Paul McCartney. Meanwhile, his company Energy Future Holdings, Texas’ biggest utility, in April 2014 filed for bankruptcy.
Apollo’s Leon Black threw a 60th birthday party for himself in August 2011 that featured Elton John as the main attraction. And he paid $120 million for Edvard Munch’s “The Scream” painting. Fellow Apollo co-founder Marc Rowan sold his Hamptons estate for $28.5 million. Apollo’s Josh Harris owns the Philadelphia 76ers and New Jersey Devils.
Sun Capital Partners, a firm whose co-founders are among Mitt Romney’s biggest contributors, owned the Friendly’s restaurant chain and after splitting off its real estate drove it into bankruptcy. Then, Sun bought it out of bankruptcy for cheap, and in the process eliminated the worker’s pension.
There is a trend of private equity firms ridding themselves of pension liabilities through pre-packaged bankruptcies.
Sun Capital drove Real Mex into bankruptcy for the second time, and its Captain D’s chain is also struggling.
PE firms dominate the restaurant space.
Caxton-Iseman made a fortune from Buffets while driving the chain into a 2010 bankruptcy.
Reuters reports in February 2012 that private equity firms are deciding whether to put new money into their struggling European companies to retain ownership, or to let them be repossessed.
US private equity giants, meanwhile, see great opportunity buying loans in struggling European companies bought in LBOs, likely to reposess them.
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.
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.
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.
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 happened at Tribune’s WPIX TV station where it eliminated the sports department.
Cerberus owned New Page was the biggest 2011 bankruptcy filing, and its creditors now say the 2007 Cerberus buyout impaired the business and doomed it to fail.
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 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.
President Obama’s choice to be Commerce Secretary was most recently a KKR Senior Advisor.
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.
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 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.
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.”
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. 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.
The Pension Benefit Guaranty Corp. that invests its money conservatively, largely in fixed income, does much better than most public pensions which have more invested in public equities and from 2005-2010 increased their allocations to private equity.
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).
British academics in June 2013 release convincing report showing that UK companies taken private in leveraged buyouts fare worse than their peers.
Oxford University 2013 revealing study on how private equity firms inflate earnings when fund-raising. Shows need to standard reporting.
Center for Economic and Policy Research releases a great Feb. 2012 study. Love how it reveals difference between the thorough World Economic Forum (Davos) Study on private equity that shows big job losses at private equity owned companies, and how the same professors that did that study then conduct a much less thorough second study that indicates private equity firm does not hurt employment. These professors, I know, are very friendly to the private equity industry. Pages 17-19.
They also on p.24 break down the differences in the academic studies done on private equity returns, revealing that the most throrough ones show average returns below the S&P 500.
Data firm Prequin in February 2012 releases good industry data, showing that private equity firms post-recession are using their companies more often to buy competing businesses, and less frequently are making new investments.
University of Chicago Professor Steven Kaplan gives a report Kaplan, PE, Past and Present, 2011. It is worth reading to better understand the argument private equity defenders make, and the data used to support their case.
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 analysis 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 2010 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.
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