| WIKI | FAQ | Tech FAQ | |
 http://csua.com/feed/ | |
| ||||||
| 5/23 |
| 2006/2/25-27 [Finance/Investment] UID:42005 Activity:moderate |
2/24 Another case of rich fat cats raping your average Americans.
Unregulated free market capitalism at its best!:
http://tinyurl.com/zo2qq (buyout firms raping hardworking
americans)
\_ You know, it's really old news when Hollywood has made films about
it 10 years ago.
\_ I applaud Forbes magazine for standing up to their corporate
masters. I think the WSJ news section had a similar article
a few weeks ago. There was probably an accompanying rant
in the WSJ editorial page about the poor oppressed
private equity firm. Anyway it's just another reason
I welcome our new financial robotic overlords.
\_ Hey smartass, this is a new and bigger wave.
\_ Don't be an idiot. This is a new and bigger wave.
And the guys in the 80s don't gut the companies they
acquire, put all the money in their pockets, and let
the companies go backrupt, screwing the employess and
stealing from the creditors. This is outright
thievery. Articles condemning it must be widely
read, and until the problem is fixed, we must continue
to pursue it and not let the crooks get away with it,
just like we don't let crooks like Ken Lay, Jeff Skilling
and Bernard Ebbers get away. Are you related to one of
these crooks yourself?
the companies go backrupt.
\_ Ken Lay et al were found through the judicial process to
have broken laws. If these buy out firms have acted
illegally, then by all means they should be prosecuted.
So has any of these firms been charged for their misdeeds?
\_ Dividend recap schemes are pretty old news too. Here's
a BofA article about it http://csua.org/u/f3b from a
couple years ago.
\_ June 2004? that's relatively recent.
\_ June 2004? that's relatively recent. But what has
dividend recap got to do with the discussion above? |
| 5/23 |
|
| tinyurl.com/zo2qq -> www.forbes.com/free_forbes/2006/0313/088.html?partner=yahoomag Driven by greed and fearlessness, private equity firms are the new power onWall Street. Hamilton James is raising one of the largest private equity funds the world has ever seen, a $13 billion whopper for Blackstone Group, renowned kingpin of the buyout business. Suddenly this thriving trade is redefining the terms of power, profit and greed on Wall Street. "Good private equity funds improve companies operationally and lower the cost of capital for those that are financed inefficiently," says James, president of Blackstone and chief of its private equity arm. who ran investment banking at Credit Suisse First Boston before joining Blackstone in 2002. As he wraps up fundraising for Blackstone V, investors are well aware of its predecessors' home runs, with Blackstone IV rising 70% a year. "If you look at our record, or any good buyout fund's record, you see consistent outperformance in good times and bad." Investors poured $106 billion into leveraged buyout funds last year, double the total of 2004, says Private Equity Analyst. Weary of the wobbly stock market and alarmed by the real estate run-up, they were lured by eye-popping returns of 50% a year (or better) at a few elite funds. Globally, 2,700 funds are raising half a trillion dollars in cash to invest; Just half a dozen giant firms control half of all private-equity assets. Three titans--Blackstone, Carlyle Group and Texas Pacific Group--lord over companies with 700,000 employees and $122 billion in sales. Buyout shops own such iconic brands as Hertz, Burger King, Metro-Goldwyn-Mayer, amc Entertainment, Linens 'N Things and more. Adept at reaping riches whether their investors win or lose, ten buyout chiefs grace the Forbes 400 list of wealthiest Americans. Among them is the billionaire cofounder of Blackstone: Stephen Schwarzman. Egging on the buyout boys: all of Wall Street, which collects marvelous fees from all the buying and selling. While it was making its own executives quite comfortable, Blackstone rewarded investment banks with $358 million in fee revenue last year. Investment banks get fees for brokering or advising on tender offers; get fees for underwriting bonds or arranging the bank debt to pay most of the acquisition costs; get more fees for selling off some of the assets to pay back the debt; and get still more fees for taking target firms public all over again. Last year saw $35 billion of public equity money raised globally as bought-out firms went public again. There would be no reason to begrudge the financiers their take if they were building enterprises and creating jobs. But they do not make their fortunes by discovering new drugs, writing software or creating retail chains. They are making all this money by trading existing assets. Some buyout firms dabble in deeds that got Wall Street and Big Business in trouble in the post-Enron era--conflicts of interest, inadequate disclosure, questionable accounting, influence-peddling and more. Increasingly the big guys jump into bed with each other. Last year buyout firms sold more than $100 billion in assets back and forth to one another, 28% of all buyout fund deals are up fourfold in two years, says Dealogic. Moreover, some buyout shops ply rape-and-pillage tactics at their new properties. They exact multimillion-dollar fees advising businesses they just bought. They burden a target company with years of new debt, raised solely to pay out instant cash to the buyout partners. It is akin to letting the Sopranos come in and gut your business to cover your gambling debts. By the Numbers Biggest Buyouts Six of the largest private equity deals ever--after KKR's 1989 colossal takeover of RJR Nabisco--all went down last year. Metro-goldwyn-mayer 49 2005 More politely known as a dividend recapitalization, this quick-buck ploy, entirely legal, paid out $18 billion in instant gratification to new owners last year, Standard & Poor's says. Now and again corporate carnage follows, as thousands of employees lose their jobs, long-term prospects are diminished and the business files for bankruptcy, stranding minority investors and debtholders. Buyout funds defend brutal tactics by citing their results: They claim to beat the overall market by five percentage points. But in fact they trailed the rise in the S&P 500 from 1980 to 2001, say professors Steven Kaplan of the University of Chicago and Antoinette Schoar of the Massachusetts Institute of Technology. Worse, their results could be headed for a slump as a huge influx of new money and bidders inflates the prices of properties at a time when interest rates could rise and increase the cost of new debt. "They're going to have to assume very substantial growth rates to justify it." Millions of low-rollers--employees and taxpayers--could feel the impact. Pension plans provide 40% of the roughly $600 billion now committed to buyout funds. Many pension plans, both corporate and governmental, are so underfunded they look to private equity to help them close the gap, or at least to tell their actuaries that they can close the gap. The stock market has gone nowhere for the past six years. How does a pension sponsor justify the assumed 8% or 9% annual return on its fund? By putting a fairly large chunk of that fund in "alternative" investments. It is taken as axiomatic that exotic investments will yield higher profits than plain old stocks and bonds. Public and private pension funds overall have less than 4% of assets in private equity. But in a cruel coincidence, underfunded pension plans and companies in bad shape rely more heavily on buyout funds than healthy firms do; the sick ones need to jack up pension plans hurt by their own faltering finances. "Not only is the relationship significant, it's perverse," says Stephen Nesbitt, chief executive of Cliffwater llc, a pension consulting firm. "Some companies don't want to take a hit to earnings or increase pension contributions," so they load up on buyout funds. Eastman Kodak's pension fund has 20% of assets in private equity; But if Darrell Butler is right--if too much dumb money is getting in at the top--the insiders who run funds will still thrive. Private-equity funds typically take a 2% cut of assets annually plus a 20% chunk of everyone else's profits. If Blackstone is doing this--and it won't say--it's getting $260 million a year up front, on its new fund and one-fifth of any upside. Warburg Pincus, Goldman Sachs Capital Partners and Carlyle rounded up $8 billion to $10 billion each last year, ensuring hundreds of millions in fees even if they never produce a nickel of profit for anyone else. This vigorish, common when a $1 billion fund was the norm, hasn't come down even as buyout funds have grown ten times as large. "It's like Moses brought down a third tablet from the Mount--and it said 2 and 20,'" says Christopher Ailman, chief investment officer of the California State Teachers' Retirement System, the nation's third-largest pension fund. "We've been trying to get the fees lower, but it's tough." lbo funds popped up in the 1980s, feeding on the junk-bond takeover craze. Blackstone was formed in 1985 when Peter G Peterson, a former Lehman Brothers chairman who had served as President Nixon's secretary of commerce, teamed with Lehman alum Schwarzman. They put up $400,000 and raised $810 million for Blackstone I two years later. Stock quotes are delayed at least 15 minutes for Nasdaq, at least 20 minutes for NYSE/AMEX US indexes are delayed at least 15 minutes with the exception of Nasdaq, Dow Jones Industrial Average and S&P 500 which are 2 minutes delayed. |
| csua.org/u/f3b -> www.bofabusinesscapital.com/resources/capeyes/a06-04-226.html print this article June 2004 The Dividend Recap Seduction The floodgates have opened. Exits are more easily accomplished now than they have been in the past few years. And one particular type of exit, the recapitalization, has really caught the rising tide. The popularity of the recap for private equity firms isn't hard to understand. A firm gets to return some cash to limited partners, the portfolio company gets to retire some debt (while adding more) and both are still in line to capitalize on the equity upside of the investment as time progresses. as low-interest rate, attractive financing," Brian Crosby, a principal at New York-based Falconhead Capital, says. "You get some liquidity and can continue to work the asset." In March, Falconhead recapitalized its Maritime Telecommunications Network, returning approximately 80% of its invested capital back to investors. Bank of America provided financing for the recap and also provided the senior financing for the deal when Falconhead originally acquired the company in February 2003. Maritime offers telecommunications services to cruise ships, off-shore oil rigs and other sea-going vessels. Since Falconhead acquired the company, it has reupped key long-term contracts to provide services for major cruise lines. Falconhead is not the only firm to join the recap gold rush. New York-based Charterhouse Group International recently recapped specialty paper manufacturer Cellu Tissue in a transaction netting the firm $82 million. Morgan Chase and CIBC World Markets led the issue of $162 million of senior secured notes with a 975% coupon. Approximately $100 million of that issue redeemed existing shareholders in Cellu Tissue, with $82 million going to Charterhouse and its investors. Investor Appetite David Hoffman, a partner at Charterhouse International Group, says one reason for the large number of recaps recently is that investors now have a large appetite for this type of high-yield debt. to keep control and consolidate or lever the company while returning original capital back to firms and limited partners," Hoffman says. Another firm to have gone the recap route is New York-based Clayton, Dubilier & Rice. In April 2003, the firm launched a $275 million tranche primarily to repay an outstanding credit facility for cosmetics company Jafra. The recap allowed the company to redeem subordinated notes and make a distribution to equity holders, including CD&R. The firm arguably kicked off the recap trend in January 2003, when it recapped weapons manufacturer Remington. "There is a demand for paper now," Michael Babiarz, a financial partner with Clayton Dubilier, says. "People are interested in good stories where a company can generate good cash flow." Babiarz says even though high-yield financing has become easier to get, it still takes a solid company with steady revenue streams to whet the appetite of high-yield investors. Offering Size Drops One reason high-yield financing has become more readily obtained is that offering sizes have dropped as investor appetite has grown. High-yield tranches used to be available only to large companies, but now, middle-market companies have access to junk bond financing. "The size of the offerings dropped below $100 million, which hadn't happened before in the middle market," Charterhouse International's Hoffman says. While recapping allows a firm to return some capital to its investors, the more important feature is a firm's opportunity to still own its equity stake and profit from it in the future. "It's attractive when the equity story hasn't fully developed, especially when a transformation is required," Babiarz says. "You want that to be complete before you sell the equity story." The Risks One remaining question, however, is whether recaps are necessarily a good thing in an economic environment where interest ratescurrently at historical lowsare set to rise. David Rubenstein, co-founder of Washington, DC-based private equity giant The Carlyle Group was quoted by Bloomberg News as saying recaps are the cocaine of private equity "because they're so seductive." "The exit mentality is forcing a focus on capital returns and not company building now, and we're guilty of it as well," Rubenstein said. By adding high-yield debt to a company's balance sheet, even if other debt is retired, a company definitely takes on risk. Once interest rates rise, a company may have taken on more debt than it can handle. "There are certainly cases of aggressive recapping," Falconhead's Crosby says. "The point is accurate that some companies may be over-levered." Crosby adds, though, that some of the current recapitalizations may be the result of the slow debt market of a few years ago. Some of these companies may have been acquired by private equity firms with a 50% to 50% debt to equity ratio. Now that the debt markets have loosened, private equity firms have the opportunity to adjust those ratios to normal private equity levelsperhaps 30% to 40% equity in a transaction. Babiarz says the companies going through a recap tend to be the ones that have demonstrated their operating potential. "While it's always possible having more leverage can cause less margin for error, underwriters are taking properties to market that have a good margin because of their track record," Babiarz says. Window May Close Quickly Though recaps have been the talk of the town for the past 16 to 18 months, most agree that their window may be closing. As interest rates rise, this type of exit looses a bit of its appeal. "The appetite will be driven by institutions investing in the high-yield offerings and their perception of the offering." No matter how long recaps are able to get done, private equity firms still appreciate a recap's ability to get returns back to limited partners. "Doing a recap, you're not going to get all you could if you sold it but you get capital earlier than you might otherwise," Babiarz says. Capital markets and investment banking services are provided by Banc of America Securities LLC, member NYSE/NASD/SIPC, a subsidiary of Bank of America Corporation and an affiliate of Bank of America Business Capital. |