“Our Job Is To Screw Them”: Translating A Private Equity Memorandum

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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]

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