Filed under: Taxes and regulations, Private equity industry

“Score one for the barbarians” — so reads the New York Post today. The reference, of course, is to Barbarians at the Gate, the sordid tale of the leveraged buyout of RJR Nabisco in the 1980s. Today, the private equity barbarians have won another battle: there will be no new tax on carried interest, at least not this year.

Charles Rangel, the House Ways and Means Committee Chairman has dropped a proposed change in the tax laws that would raise taxes on hedge fund managers. The change was relatively simple, raising the tax rate on fund profits and management fees from the current 15% to the 35% that corporations (are supposed to) pay. Needless to say, the private equity industry fiercely opposed the change, which would have raised $54 billion in new taxes.

The change in the tax code was part of a bill aimed at alleviating the effects of the Alternative Minimum Tax, which now affects 23 million households. The idea was to “fix” the AMT to keep it from being applied to broadly; the resulting loss in revenue could then be made up by increasing taxes on fund managers. But it looks like the managers are too powerful to allow that to happen, at least this time around. Hey, do you think this could have anything to do with campaign contributions and the growing political power of the newly gilded elite? Nah, couldn’t be…

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Filed under: Private equity industry

The New York Times is reporting today that a group of protesters will be demonstrating outside of Henry Kravis’s 28-room apartment on Park Avenue today. The demonstration will have a holiday feel, complete with carols and ringing bells. A movie with the jolly title of “The War on Greed, Starring the Homes of Henry Kravis” will be shown on sandwich boards worn by protesters. The film is apparently a satirical look at Kravis’s many homes and opulent lifestyle, with a comparison to the more modest homes and lifestyles of ordinary American workers.

Kravis is one of the founders of Kohlberg Kravis Roberts or KKR, one of the older buyout firms. Starting 30 years ago, KKR pioneered the use of leveraged buyouts and has now done over 160 deals. KKR manages $53.4 billion and has offices in New York, Menlo Park, San Francisco, London, Paris, Hong Kong and Tokyo. Some of its notable achievements include the first leveraged buyout in excess of $1 billion and the largest buyouts ever in the Netherlands, Denmark, India, Australia, Singapore and France.

The protesters are focused on the lower tax rate payed by partners in private equity firms, as well as the general excess of extreme wealth in the U.S. You can see the protesters movie at warongreed.org.

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Filed under: Private equity industry

The big banks must not be feeling very loved right now. The New York Attorney General is investigating their handling of subprime loans, and spent its summer issuing subpoenas to banks like Merrill Lynch & Co. (NYSE: MER), Morgan Stanley (NYSE: MS) and Deutsche Bank AG (NYSE: DB).

Now the Securities and Exchange Commission is investigating whether banks and the hedge funds they invest in are colluding to share inside information, such as the specifics of a given fund’s strategies, to gain insight into the future of the market.

Little information has been made available on the exact nature of the SEC’s investigations. Because hedge funds are private, they are not required to publicly disclose SEC investigations the way the way that a public company would in the face of a formal inquiry.

The hedge fund industry has grown extremely rapidly over the past few years to its current size of $1.9 trillion, and regulators probably have a fair amount of catching up to do in terms of investment malfeasance.

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Filed under: Deals, Cerberus Capital, Private equity industry

By the end of August, it was clear that Cerberus Capital Management’s buyout of H&R Block’s (NYSE: HRB) Option One Mortgage unit was in trouble. Yesterday afternoon, the firms announced that the dead is dead.

In the original deal, announced in April, Cerberus agreed to pay H&R Block as much as $800 million for Option One Mortgage Corp., which focuses on subprime loans. This price represents a significant discount on the price H&R Block was originally looking for, said to be $1.3 billion.

An article in today’s New York Times quotes H&R Block Chairman Richard Breeden as saying: “The mortgage market today has undergone vast changes since last April when the original Cerberus deal was signed. Despite the hard work and good faith of both sides we could not find a way to restructure the original transaction to mutual satisfaction.” The deal’s termination was reported to be amicable.

So it looks like this broken deal is another casualty of the ongoing credit crunch. Cerberus obviously couldn’t make the numbers work given the increasing scarcity and higher cost of capital. H&R Block announced that it will lay off 620 employees at Option One and stop taking new mortgage applications. No word on the fate of Option One’s loan servicing business, which was Cerberus’s original target and may still hold some value.

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Filed under: Deals, Private equity industry, Value and lack thereof

You think subprime is a mess? We may have another big-time problem — the leveraged buyout (LBO) binge. This week’s Barron’s has a good piece on the matter.

Private equity firms tend to focus on mature companies, which produce lots of cash flows. There is usually a good amount of cost-cutting as well. But for the private equity firms to make real money, they need to pile on the debt. This is fine — so long as there is enough cash flow.

Unfortunately, it looks like the U.S. economy is slowing down. As a result, some LBO deals may fall apart because they can’t meet debt payments.

Wall Street is already getting nervous. For example, Barron’s points out the sluggish bond prices for companies like Realogy, Swift Transportation, Linens ‘n Things, Claire’s Stores and Dollar General. Some buyout deals are even trading at about 50 cents on the dollar.

All in all, we may see wipe-outs of the equity stakes for private equity firms. It’s a good bet that the returns — for 2008 to 2009 — will pale in comparison to the boom times.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates DealProfiles.com.

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Filed under: The Carlyle Group, Private equity industry

Carlyle Group co-founder David Rubenstein spoke at a Washington symposium on the private equity industry, and his predictions for the future aren’t too rosy.

According to TheDeal.com, he said that “I think the golden era of private equity is probably behind us, and we’re in a new era and need to adapt.”

Among the challenges are a tightening of the credit industry (duh), and a political climate that is becoming increasingly hostile to the industry.

Addressing the image problem, he opined that “It’s very good for people like Carlyle to say we have great rates of return, but now that isn’t enough. We have to explain to people why it’s a good thing for the economy and go to members of Congress and the government and the press. If you ignore this function, you won’t be a very successful private equity professional, in my view. We can’t run away from our critics.’”

Much of the industry’s image problem can be related to the greed of Steve Schwarzman. His Blackstone (NYSE: BX) has lost around 40% of its value since it closed trading on the day of its IPO. The public offering was widely seen as an attempt by Schwarzman to cash out part of his holdings at the height of a bubble of sorts, at the expense of minority shareholders.

But Rubenstein is right. The industry can fix its image problem if it makes a concerted effort. The benefits of buyouts are many, but little understood by most people because the only people bothering to address the issue publicly have been special interest groups opposed to buyouts.

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Filed under: Raising money, Private equity industry, Investments

You think subprime is a mess? We may have another big-time problem — the leveraged buyout (LBO) binge. This week’s Barron’s [a paid publication] has a good piece on the matter.

Private equity firms tend to focus on mature companies, which produce lots of cash flows. There is usually a good amount of cost-cutting as well. But for the private equity firms to make real money, they need to pile on the debt. This is fine — so long as there is enough cash flow.

Unfortunately, it looks like the U.S. economy is slowing down. As a result, some LBO deals may fall apart because they can’t meet debt payments.

Wall Street is already getting nervous. For example, Barron’s points out the sluggish bond prices for companies like Realogy, Swift Transportation, Linens ‘n Things, Claire’s Stores and Dollar General. Some buyout deals are even trading at about 50 cents on the dollar.

All in all, we may see wipe-outs of the equity stakes for private equity firms. It’s a good bet that the returns — for 2008 to 2009 — will pale in comparison to the boom times.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates DealProfiles.com.

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Filed under: Deals, Raising money, Private equity industry

According to research firm Dealogic, the M&A market is in a big-time downward spiral. For November, the U.S. market saw a 71% drop in deal values to $58.1 billion.

If history is any guide, the M&A market is a feast-or-famine business, and the transition can happen fairly quickly.

Of course, a key factor is the credit crunch. It takes gobs of debt to get deals done, especially for private equity. Also, with an uncertain economy, strategic buyers may also be holding off - even if the valuations look compelling.

Interestingly enough, five of the top 10 deals in November were from foreign-based buyers. With sovereign funds bulging with U.S. dollars, the trend should continue. Although, some of the latest deals have been minority investments, such as the $7.5 billion Citigroup (NYSE: C) transaction from Abu Dhabi Investment Authority.

However, without the juice from private equity, it’s hard to make a case for a strong 2008 (the average deal size was a measly $127 million in November). So, for M&A dealmakers, they may want to be thinking of getting another career.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates DealProfiles.com.

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Filed under: The Carlyle Group, Private equity industry

One of the pioneers of private equity is The Carlyle Group. The firm has minted billions and is a major force in finance, managing about $76 billion.

But lately things have cooled off. For example, Carlyle’s Blue Wave hedge fund is down 9.3% for the year (this is according to a piece on Bloomberg.com). The problem was exposure to pesky mortgage investments.

So it should be no surprise that Carlyle’s co-founder, David Rubenstein, is kind of glum. He recently commiserated for the folks at the American Enterprise Institute (there was also coverage in TheDeal.com, which is a paid publication).

Rubenstein thinks that private equity may be facing some tough times, and looks at the parallels of the conglomerates of the 1960s.

It’s a pretty apt analogy. After all, as private equity firms get bigger and bigger, they look like bloated entities of disparate business units. In other words, might there be lots of complications in managing all this?

I think so.

Besides, the other big issue is finding liquidity for these private companies. Keep in mind that the IPO market has yet to recover from its boom days of the 1990s. And, M&A appears to be tailing off. Oh, and with the credit crunch, how will private equity funds get financing for deals?

So far, there aren’t many clear answers. Or, at least Rubenstein isn’t giving us any ideas so far.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates DealProfiles.com.

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Filed under: GS Capital Partners, Venture capital industry, Private equity industry

This would not happen in the U.S., or most other places for that matter. But, China is China, and the rules there are different. Goldman Sachs (NYSE: GS) “China partner, Fang Fenglei, is moving forward with plans to set up a private-equity fund that could complicate his relationship with Goldman as both hunt for investments in China,” according to The Wall Street Journal. Fang will probably get to keep his title as chairman of the investment banking joint venture, Goldman Sachs Gao Hua Securities.

But why? Feng is about to take dollars out of Goldman’s pockets. Feng’s new fund will be partners with an investment arm of the Chinese government. Who is going to get first look at the best deal, Goldman or a fund run by the locals? The Journal points out that insiders already have an advantage. “Foreign private-equity investors have found their ability to close deals hampered amid booming Chinese stock prices and mounting concern within China about foreigners buying into important industrial assets.”

Yes, the Chinese want to keep the best part of the steak for themselves. It is a closed system, so it can do that. But, Goldman does not have to make it easier.

Douglas A. McIntyre is an editor at 247wallst.com.

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