I’m just some guy, but two entities of which I have become aware in my travels are (1) Apollo Global Management and (2) CalPERS. I don’t want to endorse 100% of what either of them does – CalPERS tend to be governance-scoldy, and I’ve seen with my own eyes the withered husks of formerly personable M&A lawyers who’ve spent too much time on Apollo due diligence – but I don’t think it’d be too controversial for me to say that they’re both acknowledged leaders in their fields, those fields being respectively (1) running private equity funds and (2) investing great gobs of pension money in, among other things, private equity funds. To the point that, (1) if Apollo came to me and asked “who should we ask to invest in our new private equity fund?,” CalPERS would probably be high on my list, and (2) if CalPERS came to me and asked “what private equity funds should we invest in?,” Apollo would probably be high on that list.
So where is my $20 million?
Today former CalPERS CEO Federico Buenrostro and former independent placement agent Alfred Villalobos were indicted for fraudulently funneling $20 million of placement-agent fees from Apollo to Villalobos. The case is bonkers for reasons well summed up by Dan Primack a year ago when the SEC brought a related civil case. The gist of it seems to be: Read more »
Lynnley Browning has an interesting article in DealBook about “supercharged IPOs” today. The gist is that some private equity portfolio companies go public, but keep in place agreements requiring them to pay over 85% of certain tax benefits that they receive to their former IPO owners. This, or so the argument goes, is both unfairsies – why do private equity firms get that money rather than the current shareholders? – and also, y’know, opaque secretive financial engineering etc. Viz.:
Now, buyout specialists are increasingly collecting continuing payouts from their former portfolio companies. The strategy, known as an income tax receivable agreement, has been quietly employed in dozens of recent offerings backed by private equity …
While relatively rare, the strategy, referred to as a supercharged I.P.O., has proved to be controversial. To some tax experts, the technique amounts to financial engineering, depriving the companies of cash. Berry Plastics, for example, has to make payments to its one-time private equity owners, Apollo Global Management and Graham Partners, through 2016.
“It drains money out of the company that could be used for purposes that benefit all the shareholders,” said Robert Willens, a corporate tax and accounting expert in New York who coined the term “supercharged I.P.O.” …
Another potential issue is that sophisticated investors do not necessarily understand the deals, either. The agreements typically warrant just a few paragraphs in a company’s I.P.O. filings.
So that last part, meh. The prospectus for Berry Plastics – the main example DealBook cites – describes its income tax receivable agreement in several places and pretty clearly. It explains what’s going on – “we’re funneling 85% of our tax savings from current NOLs to our pre-IPO shareholders” – and even gives some numbers, estimating that the payments will total $310 to $350 million and mostly be paid by 2016.1 It’s not really all that tricky. Read more »
The antitrust lawsuit against all the big private equity firms, accusing them of colluding with each other to drive down prices on LBOs in the 2003-2007 boom, was always a bit of a puzzler. On the one hand, there were lots of emails between private equity firms that they’d probably like back, to the effect of “hey thanks for not bidding on my last deal, hope you enjoy my not bidding on your next deal!” On the other hand, the lawsuit was sort of a mess, full of hazy accusations, unsupported conspiracy claims, and the sort of unfalsifiable tin-hattery that sees occasional fierce bidding wars between private equity firms as just a cunning cover-up of their conspiracy not to bid against each other.
I blog for a living, such as it is, so sometimes I would complain about that confusion, but Edward F. Harrington is a federal judge for a living so he gets to just fix it:
Plaintiffs persistent hesitance to narrow their claim to something cognizable and supported by the evidence has made this matter unnecessarily complex and nearly warranted its dismissal. Nevertheless, the Court shall allow the Plaintiffs to proceed solely on this more narrowly defined overarching conspiracy because the Plaintiffs included allegations that Defendants did not “jump” each other’s proprietary deals in the Fifth Amended Complaint and argued in response to the present motions that the evidence supported these allegations. Furthermore, the Court concludes that a more limited overarching conspiracy to refrain from “jumping” each other’s proprietary deals constitutes “a continuing agreement, understanding, and conspiracy in restraint of trade to allocate the market for and artificially fix, maintain, or stabilize prices of securities in club LBOs” ….
And so he ruled today on a summary judgment motion, getting rid of most of the crackpottery but letting the plaintiffs go forward on the claim that the private equity firms had an agreement not to jump each others’ deals after they’d already been signed. Read more »
“Hedge funds and private equity funds are secretive pools of capital blah blah blah,” people always say, and there’s some truth to that. But it’s partly true partly because a certain discretion is required by law. Banging on publicly about how awesome your hedge fund is could be taken as a “general solicitation” for investors, which was (and still is!) verboten, though nobody at CNBC takes that risk particularly seriously. But now that’s changing, sort of, sometime, with the JOBS Act, which will eventually allow hedge funds and private equity funds to advertise to the many though still only sell to the few.
Carlyle Group is now selling to the slightly-more-few via a Central Park Advisers feeder fund called CPG Carlyle Private Equity Fund, with a minimum of just $50,000. In keeping with no-general-solicitation rules, the Confidential Memorandum describing the CPGCPEF “is intended solely for the use of the person to whom it has been delivered for the purpose of evaluating a possible investment by the recipient in the Units of the Fund described herein, and is not to be reproduced or distributed to any other persons,” but it is also filed with the SEC. It’s super secret! It’s only available to anyone with a computer!
The memo, and today’s Journal article about the Central Park fund, are fascinating reading. But also so, so sad. Here’s the Journal: Read more »
If you were Microsoft and the sponsors of an LBO came to you and said, “we have about $17bn in debt to place, do you want $2bn of it,” would you say yes? Let’s say you’d say yes: would you demand a higher or lower interest rate for it than everyone else?
The Dell deal is pretty new and soon we’ll have a Background of the Merger to chew over – and, y’know, actual deal docs – but for now the most informative reporting seems to be this Journal story and it’s … sort of odd. Here is Microsoft’s involvement:
Between Silver Lake and Mr. Dell, the buyout group felt it could arrange for cash and loans on its own. The choice was between taking on $2 billion more in high-yield debt or bringing in Microsoft as a “passive debt investor” who would get no board seats or governance rights, but would be “emotionally and financially committed” to Dell’s future, a person said. Microsoft and Dell already are partners, but the $2 billion debt was aimed at creating a closer partnership between the two within an existing commercial agreement, the person and others said. Microsoft’s $2 billion note is a multi-year instrument with an attractive interest rate, one of the people said.
I don’t know what any of those words mean! The concept of Microsoft being “emotionally committed” to anything particularly boggles me. (It may have something to do with supporting “the long term success of the entire PC ecosystem” without ticking off other manufacturers by taking an equity stake in Dell.)
Also, I don’t know what “attractive interest rate” means. Read more »
Underwriting a stock or bond deal can be very difficult and work-intensive: you need to coordinate your t-shirts for the pitch, manage logistics ranging from prospectus writing to investor-lunch-sandwich-buying, and actually convince investors to buy whatever it is you’re selling. But it can also be very easy. The limit case of easy underwriting is:
- Your phone rings at noon on a Tuesday.
- You answer it.
- “Hi, it’s Company X. How’d you like us to write you a check for $100,000 in exchange for letting us put your name on the cover of a document?”
- “Sounds good,” you say.1
- “Great, there’s a diligence call at 4:15pm. We price at 4:30.”
I’ve always liked the purity of this business model: basically, someone writes you a check, and you deposit it,2 and that’s that; you never sully yourself by actually providing them any service. But what’s in it for the client: why write you a check for doing nothing?
The answer goes something like this:
- There are fixed-ish fees for underwriting services – 7% for IPOs, 3% for follow-on equity, 2-3% for high-yield, a sliding scale based on maturity for IG.
- If you want actual underwriting done – someone to write a prospectus, call investors, and market the deal – you gotta pay those fees.
- Unless you’re Facebook or something, you have to pay pretty much the full fees.
- But you don’t have to pay all of them to the bank or banks actually doing the underwriting.
- Generally you have to pay each active bank at least as much as you pay any other bank,3 but you can still hand over a decent chunk of the fees to lower-level passive bookrunners, co-lead managers, co-managers, and other fancy titles for “bank that receives check.”
- So you essentially have “free” soft money: you’re writing a $3mm check anyway for that $100mm deal, but you can allocate $1mm or so of it to anyone with a securities license.
- So you might as well hand that free money to banks who’ve been nice to you: banks who lend you money at below-market rates, say, or advisors who’ve done lots of free work on M&A ideas that have never happened.
Read more »
I for one was heartened a few weeks ago by Petco’s PIK-toggle dividend recap debt deal at 8.5%, which I interpreted as a moderately bullish signal of economic confidence while also keeping an open mind to the possibility that it was simply a one-off indication of investor love for dogs. Dogs! Today the Journal provides additional similar data points and the recovery seems to go beyond the pet-supply sector:
Debt issued to fund private-equity dividends has topped $54 billion this year, after a flurry of deals earlier this month, according to Standard & Poor’s Capital IQ LCD data service. That is already higher than the record $40.5 billion reached in all of 2010, when credit markets reopened after the crisis.
Also some of these deals involve a risky type of debt known as “payment in kind toggle”—or PIK-toggle—bonds that give companies the choice to defer interest payments to investors. Instead, they could opt to add more debt to the balance sheet. The default rate for companies that sold PIK-toggle bonds was 13% from 2006 to 2010, twice the default rate for comparably rated companies that didn’t use the bonds, according to a study by Moody’s Investors Service.
If you use PIK-toggle-dividend-recap as a barometer of economic activity, and of course you do, then yes it is definitely creeping toward its highest, “2006″ setting. On the other hand another barometer isn’t. Equally enjoyable was the Journal’s companion piece on the bad news implied by dividend recaps: Read more »
I feel like this came out wrong:
The idea that capital gains treatment should only be available to those with money to invest would advance a policy that puts a higher value on financial contributions than vision, hard work and other forms of sweat equity.
That’s from Steve Judge, president of the Private Equity Growth Capital Council, and I think he just said “the idea that capital gains treatment should only be for gains to capital is unfair to people who earn their income from labor,” and, I mean, that’s certainly a position you can have, but … I dunno, that’s not how I’d argue for taxing my labor at a lower rate than other people’s labor?1
It’s from this very funny FT article about the incidence of changes to private-equity taxation. Basically you can just about imagine, if you have an overactive imagination, that a second Obama term would bring changes to the tax treatment of carried interest so that the 20 in private equity’s 2-and-20 would be taxed as ordinary income (35%) instead of capital gains (15%). As with any tax on a business it’s worth asking who actually pays it, and one possible answer is “well, if we amend our partnership agreements to require LPs to gross up managers for any change in the tax code, then the LPs will pay it, won’t they.” That answer turns out to be (1) something that people have actually tried and (2) wrong: Read more »
If you’re trying to sell a company there are two basic but opposite approaches. In one, you approach the best buyer, negotiate exclusively, and generally do what you can to get them to put their best foot forward in exchange for not having the headache of a multi-round, winner’s-cursed, might-get-topped-by-a-penny auction. In the other, you just run the auction and hope for the winner to get cursed, at the risk that the best bidders won’t play, or won’t bid aggressively, because they’ve been here before and understand the dynamic. There’s no approach that is just a priori right; you have long heart-to-hearts with your banker and look at unilluminating comp sets and feel out your best-bet bidders and then sort of take a guess about what’s the right thing to do.
There is an asymmetry here, though: if you do the exclusive approach, you get lots and lots of sued, because think of all the people you could have asked to bid but didn’t (and scared away with breakup fees or whatever). If you do the auction approach, you’re less likely to get sued, because it’s harder to think of all the people who you did ask to bid but who refused because they didn’t want to be winner’s-cursed. The fact that negotiated deals still happen is a testament either to boards’ and bankers’ commitment to shareholder value, or to the fact that those negotiated deals really are as conflicted as plaintiffs’ lawyers say they are and the boards and bankers are pursuing their own selfish agendas.
Anyway LBOs are back: Read more »
If you work in private equity the last few months have not been kind to you. Man, dog, and Newt have all been ganging up on the industry, and it has not been helped by faux pas from its most famous alumnus, publicity around job losses and dividend-recaps-into-bankruptcy, or a renewed carried-interest debate.
Not to fear, though: coming to the rescue today are a rag-tag bunch of saviors including a cheesy website, a serial private equity CEO who’s pretty sure he was never instructed to torch the place for insurance money, aaaaaaand Blackstone’s Tony James: Read more »
Unlike some private equity famewhores, Steve Schwarzman is a modest, retiring type who shuns all ostentation and just wants to be left alone with his crabs. So it’s not surprising that he doesn’t want those gossip hounds at the Fed all up in his personal finances, and that he’s willing to go to extreme lengths to avoid just that. How extreme? Check this out:
Blackstone is converting part of its 14.1% stake in BankUnited Inc. to nonvoting preferred stock, these people said. The deal will shrink its voting stake to less than 10%, pushing the New York firm below the level at which the Fed requires personal financial data from the Florida bank’s owners.
It isn’t clear why Mr. Schwarzman is sensitive about providing such information. The longstanding Fed rule is in place to allow the regulator to gauge the safety of banks by evaluating the financial resources of their owners. The financial information gathered about a bank’s owners isn’t available to the public, even if requested under the Freedom of Information Act, according to people familiar with Fed policies. …
The matter of Mr. Schwarzman’s personal financial information is tied to BankUnited’s plans to convert from a savings-and-loan institution to a national bank. … As part of the conversion, the Fed requires detailed financial information from “principals” of entities that own more than 10% of the bank’s stock.
So … not that extreme? Two obvious things: Read more »