Just in from our Wharton Conference Correspondent:
The event has been taken over by protesters. For real. The police are coming. They are protesting the speaker from Carlyle Group – Its amazing really – The room is out of control…becoming violent. Wharton staff not prepared for the demonstration. Literally just watching them take over the room …. Rubinstein is speechless and standing there alone on the stage facing it ….. Carlyle bought manor care a few weeks ago and layoffs are coming. Its like – France. Pushing, shoving, punching – everywhere. No sign of Bowie still. Rubenstein just told a protester on a bullhorn to “take a remedial course in English before you go any further.”
Private equity executives make no secret that relatively plentiful credit is the fuel power the surge in giant leveraged buyout deals, allowing the buyout shops to make acquisitions on companies which might have been untouchable in earlier eras. So it comes as a bit of a surprise to hear so many of them seem to be warning us about rising debt coupled with looser lending standards. Carlyle founder William Conway has rang the alarm bells with a memo of his that was “leaked” to the press everywhere. Remarks of Leon Black and Steve Schwarzman also have been read as warnings.
The latest entrant is the chief executive of BlackRock, Larry Fink. BlackRock is not a private equity shop—it’s an asset management firm that was spun-off of the Blackstone Group way back in 1992. But Fink’s background is in debt and private equity. He was a bond-trader at Credit Suisse and worked at Blackstone before the spin-off. And now he’s telling the Financial Times that the leveraged debt fueling the buyouts may be the next subprime mortgage crisis.
“If I was the chairman of the Federal Reserve, I’d be paying more attention to that because, to me, this is going to be tomorrow’s problem,” Mr Fink said in an interview with the Financial Times. “Standards have deteriorated to levels that we never even dreamed that we would see.”
So has Larry gone over to the other side? Perhaps. His business does compete for investment dollars with private equity firms and hedge funds, and so he may have a vested interest in seeing the current golden age of private equity come to an end.
But there’s a more paranoid theory that was suggested to us by a source (who requested that we keep him anonymous) who works at a smaller private equity shop. His theory was that the big shots in private equity were beginning to worry that the loose credit standards were allowing others in the buyout market to make bids that might once have been exclusively within the reach of the Blackstone’s, Apollo’s and KKR’s of the world. The relatively easy access to credit was fostering competition in the once cozy world of private equity, and driving-up the prices of the companies they want to take private. So they want to talk investors out of getting involved in lending into the buyout market in order to make it harder for competitors to raise funds.
Of course, as even our source admitted, this theory is more than a bit paranoid. But just because you are paranoid doesn’t mean Henry Kravis isn’t thinking about how to crush you. BlackRock chief warns on leveraged loans [Financial Times]
One thing we’re kind of tired of is the question “if they’re selling, are you a buyer?” It’s getting thrown around a lot these days with respect to private equity and hedge fund public offerings. The idea is that if these financial big-wigs are selling, it must be a sign of a market top. It’s tired, misleading and we’ve had enough of it. (And we’re still hearing from our younger brother who is angry he listened to this kind of thing when he had the chance to buy into the Goldman IPO.)
But it’s probably not going away. It’s certainly been one of the dominant reactions to the news that Carlyle is in “monitoring mode”—considering a public offering and waiting to see how Blackstone’s public offering pans out.
Carlyle founder David Rubenstein told the Washington Post that Carlyle is “a natural candidate to go public.”
“Today we are not working on an IPO. But…if our competitors all go public and all of them seem to be stronger than they were before, obviously we would have to take a look at the situation,” Rubenstein says.
[Editor’s Note: How’s that for bold, market leadership?]
Roger Ehrenberg, who writes the Information Arbitrage blog, approves of the idea of Carlyle going public.
The fact of the matter is that Carlyle is a great candidate to go pubilc – it has a portfolio diversified by geography, industry, and size, involves multiple levels of the capital structure and will soon have a hedge fund offering as well. While not as diversified as Blackstone, which has both an advisory component and a significant fund-of-funds business (via BAAM), it has a stellar track record and a roster of managers that is the envy of the industry.
FT Alphaville is a bit more skeptical.
But, in the Post story, one telling remark is Rubenstein’s overall take on the industry’s fad for listing. “These guys who built these private-equity firms: You can say many things about them, but one thing you can’t say it they’re stupid, or they are not an alpha male,” says Rubenstein. “These guys are going to be fairly forthright about getting what they think they earned for building these firms.”
You’ve seen that Carlyle Group memo right? It’s a memorandum that is sure to get lots of attention from the financial media and Wall Street. And, perhaps, from historians writing about this very, well, special moment in finance. One reason that it will get so much attention is that it has apparently been leaked to “many a media source,” raising suspicions that it was intended for public consumption despite its appearance as a straight-talking internal missive.
In the memo, Carlyle Group founder William Conway lays out the strategy he thinks his firm needs to pursue to prepare for the end of era the cheap debt that has helped fuel the private equity boom.
Here’s how Daily Institutional Investor describes some of the content:
“The longer it lasts, the worse it will be when it ends,” Conway, directing his memo to his p.e. peers at Carlyle, stated, “Frankly, there is so much liquidity in the world financial system, that lenders are making very risky credit decisions. This debt has enabled us to do transactions that were previously unimaginable, and has resulted in generally higher exist multiples than entry multiples.”
That sounds rather high-minded. But surely it’s too naïve to read this memorandum as if Conway was simply concerned with the eventual fate of those who had provided financing for private equity deals. We think it’s important to read this with a bit of a cold, cruel eye. This might not be fair to Conway’s intention. So, if you want, consider it what Conway might have meant if he was a worse person than his lawyers will no doubt assert he is after they read this.
Without further qualification or legal parachutes, we give you the Horseman Pass By translation of Conway’s talking points.
–“If the excess liquidity ended tomorrow, I would want as much flexibility as possible – are our covenants loose enough? Have we hedged against a share upward move in rates? Can we draw down on our revolving credit loan facilities?” he asked.
Translation: Strip those goddamn covenants down even further. Why are these lenders even getting covenants anymore? That’s our money they have, they just get to hold it till we want borrow it!
–“Second, liquidity has led to a significant reduction in risk premiums – most investors in most asset classes are not being paid for the risk being taken. Our strategy should evolve to take lower risk deals and earn lower returns.”
Translation: Our lenders have gotten totally screwed, taking on crazy risks—see that whole bit about covenants above—without any promise of adequate rewards. Let’s remember: never get as crazy as our lenders.
–“Third, we should redouble our focus on deals with downside protection – asset coverage, multiple and early exit paths, strategic partners, government protection, consumer needs, controllable capital expenditures and defensible market positions,” he said.
Translation: We need to find even more people to take the heat when things get hot. “Strategic partners” is code for “guys we can force to buy us out when we get sick of holding worthless equity.” Our job is to screw them. That’s why we call them “strategic.” Also, make sure the debt follows them. Carlyle Founder Warns Of Impending Downturn [DailyII.com]
See also our C-Suite Brother, Super Mogul: Carlyle, one again huge buzz kill [SuperMogul]
More former Amaranth guys landing jobs in London, according to the Financial Times:
US alternative asset manager The Carlyle Group becomes the latest firm to hire staff from Amaranth Advisors, the US hedge fund manager that collapsed in September, according to Financial News, who quoted the news source as HedgeWorldNews. Scott Davidson, a former Amaranth structured product portfolio manager, John Bailey, an ex-long/short energy equities manager at the firm, and Jaime Gualy join Carlyle Blue Wave, the firm’s new hedge fund unit.
Back in the late nineties we briefly considered becoming derivatives traders just to work with one guy—Ralph Reynolds. He had recently been hired away from Morgan Stanley by NatWest to develop a U.S. equities derivatives business for them. Word was that Ralph was the real deal, hardcore, that he “got it.”
That move didn’t last long. Soon NatWest itself was on the block—it would eventually wind up with the Royal Bank of Scotland—and Ralph’s team wound up with Deutsche Bank, running their proprietary trading desk. (It was right around this time, by the way, that the NatWest 3 were allegedly doing whatever it is they allegedly did.) Someone else gave us a different job and our dreams of trading for Ralph slipped away.
Over the years we kept hearing about Ralph. When Morgan Stanley seemed to be melting down in 2005, for instance, he hired a bunch of lads from Morgan to work for him at Deutsche. Someone once wondered aloud if Ralph’s success at Deutsche was turning the entire bank into one big hedge fund.
Well, Ralph’s still with us. But he won’t be with Deutsche Bank for long. This morning Reuters is reporting that Ralph is moving over to Carlyle to run a hedge fund.
Carlyle to hire chief for new hedge fund-sources [Reuters]
In our experience the only reason someone moves from any other field in the world—government service, media, law, college teaching—into private equity is a drive to dramatically improve the world by making lots of money for themselves.
So what did Norman Pearlstine, the former editor in chief of Time Inc., say about why he is joining the Carlyle Group as an adviser of media acquisitions?
The New York Times quotes him as saying he was making the move “because there didn’t seem to be a logical next print job.”
Translation: Sixty-three year old Pearlstine wants to make a lot more money.
Alternate translation: Those media people were mean to me after I made Matt Cooper turn over his notes on the Valeria Plame case. So now I’m going to help a private equity group buy their companies.
Ex-Editor in Chief of Time Inc. Joining Carlyle Equity Group [New York Times]
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