Archive for the ‘Private Equity’ Category

A tax increase on private equity and hedge fund executives

From the Financial Times:

A tax increase on private equity and hedge fund executives was passed by the House of Representatives on Friday as part of a package to fund middle class tax relief, but faces a likely veto by President George W. Bush.

The $50bn (€34bn, £23.89bn) tax increase was approved by a vote of 216-193 with all Republicans voting against the package and threatening to block the legislation in the Senate.

The passage of the bill is a setback for the private equity and hedge fund industries and makes it more likely that executives will in time see their tax rate doubled, depending on how Democrats fare in election campaigns next year.

The revenue raised has been earmarked to pay for relief for more than 23m middle-class families who would otherwise be caught by the alternative minimum tax.

The AMT is an archaic levy that was originally designed to catch 200 wealthy families that paid little or no tax, but has expanded stealthily because it was not indexed for inflation.

For a start, I don’t see that a tax increase on executives of specific industries should fairly face a tax increase – why not, say, oil or weapons industries? Their products are actively harming people. Of course this is not the case: the Financial Times is just doing a bad job. The tax is on carried interest, that thing executives of these industries use as income, call capital gains, and scam a lower tax rate on. Rather than fix the problem, the government has decided just to tax the problem (it’s an Austrian kind of day, all told). The tax also does apply to any other industry – whose executives are pulling this scam on the American people.

Second, how archaic must the Alternative Minimum Tax be, if it was designed to catch 200 households but is going to catch 23 million households, now? Call me an idealist, but those numbers tell me of a government that hasn’t been doing its job.

Third, of course – why in God’s name does a government with a budget the size of this one need any new taxes to pay for things? I think carried interest is a scam, as I said, but it should be fixed for that reason – not because the government is too chicken to, say, stop handing over money in tens of billions to the Pentagon.

Finally, the story’s punchline was Secretary Paulson demonstrating, as is his wont, the difference between an elected official, an appointed official and – particularly these days – a competent official:

Treasury secretary Henry Paulson called on the Senate simply to extend tax relief but “not raise other taxes”.

Priceless. They say he’s in charge of the economy, you know.


Oil revenues write big cheques: stock exchanges and equity groups targeted

From today’s Sydney Morning Herald:

Abu Dhabi agreed on Thursday to pay $US1.35 billion ($1.57 billion) for 7.5 per cent of Carlyle Group, the world’s second-biggest private equity firm. Dubai and Qatar took competing stakes in the Nasdaq stockmarket, London Stock Exchange and Nordic bourse OMX. Qatar also won approval to examine the financial records of J Sainsbury, the second-largest UK supermarket chain.

The deals are worth $US25 billion, data compiled by Bloomberg shows. The pace of international investments by Gulf states, which earn $US1.2 billion a day from oil exports, is quickening as they seek to diversify. They have already spent a record $US68 billion on overseas acquisitions this year.

“They are not just putting their money in bank deposits and government bonds any more,” said Eckart Woertz, the chief economist for the Gulf Research Centre in Dubai. “They are after strategic assets.”

Strategic assets indeed. Talk abounds moreso about possible take-over action with respect to the London Stock Exchange.

Should be interesting – we should remember, still, what happened the last time a Qatari outfit went in for a strategic asset (and DP World’s picking up of US ports was an accident – those were owned already by a foreign company, just an English one. English is okay; Qatari is not – as though anybody can track ownership of anything these days). DP World had to off-load the P&O part of the English parent, but now we see big stakes being taken in the likes of the Carlyle Group, the Nasdaq and the LSE (and the Dubai Bourse in fact bought Nasdaq’s share of the LSE – it isn’t as though we ought to be protesting against only one of those two partners, now, is it? Though I’m sure we will).

We anticipate the reaction of the local (New York) Murdoch tabloids. If they can STFU about Clinton, Giuliani or the Yankees for 5 freaking minutes.

Private Equity buy-outs: one goes out, one comes in

Very interesting!

KKR and Goldman Sachs on Friday attempted to pull the plug on the $8bn buy-out of Harman International, the high-end US electronics company, as the battle over the completion of deals signed before the credit squeeze turned increasingly ugly.

The move by KKR and Goldman’s private equity arm could prove to be a watershed moment for buy-out firms that went on an extraordinary dealmaking binge earlier this year but are now facing higher financing costs and a shaky economic outlook.

It signals that in certain cases, private equity groups are willing to sacrifice the reputational risk associated with abandoning deals, and the danger of not being viewed as credible buyers in future takeovers, in order to clear unwanted deals from their table in this cycle.

Nor is this the only example. From the same article:

This week, a consortium led by JC Flowers, the US private equity firm, considered invoking a MAC that would allow it to pull out of its $26bn deal to buy SLM, the parent of Sallie Mae, the large student lender.

The JC Flowers group believes that conditions at SLM have deteriorated enough both in terms of the company’s performance, due to the credit squeeze, and in terms of new legislation cutting student loan subsidies that is expected to be signed by George W. Bush, US president, people familiar with the matter said.

Meanwhile, Genesco, a US footwear retailer, filed a suit in a Tennessee court against Finish Line, a rival, to force it to complete their $1.5bn merger, which was announced in June. Finish Line declined to comment.

Which rather makes the Equity market messy, just at the moment. I look forward to the logical end-point: a single Private Equity firm simultaneously pursuing one deal while trying to break out of an old one.

Meanwhile, also reading the Financial Times (on my phone – news options are limited, therein), I found a bloody good example of irony:

The price of fine wine has fallen for the first time in a year as ripples from the credit squeeze reach the luxury goods market.

An index that shows prices for the world’s great vintages, the Liv-ex 100, dropped in August.

Prices in the sector had been up 43 per cent since January because more investors moved into alternative asset classes. But that bull run may be coming to an end, according to experts.

The irony?

The wine market has become dominated by professional money. Several wine funds have been set up in recent years as investors have sought “alternative” assets, which are not correlated to equities. Simon Staples, sales director at Berry Bros & Rudd, said people tended to “fly” to wine when other asset classes were suffering.

But Mr Gibbs argued that a clear link had emerged between stock market indices and the trade in wine. “The professional money in the market means that the wine market reacts much more quickly.”

Which basically just means it sucks to be into wine and not be a Rich Young Something to splash that sort of money about.

Cerberus Capital Management first back in the leveraged buy-out game

I think (and as I write quickly: WordPress now tells you when scheduled maintenance is due to begin – a wonderful introduction!).

Stora Enso Oyj, the world’s largest paper maker, will sell its North American unit to Cerberus Capital Management LP for $2.07 billion after the U.S. price of newsprint and magazine paper fell 6 percent in a year. The Finnish company’s stock rose the most since 2003.

Stora shares rose as much as 7.6 percent. The company said proceeds will be used to pay down debt. Cerberus will assume $450 million in debt in addition to the $2.07 billion payment for eight paper mills.

Now, oddly:

Falling demand for U.S. newsprint and magazine paper and the decline of the dollar against the euro made the mills in Wisconsin, Minnesota and Canada a drag on the Helsinki, Finland- based company. Stora, which cut 1,600 jobs and closed mills in Europe in the past two years, wrote down the value of its assets earlier this month amid rising wood costs and a worsening outlook.

Just what is Cerberus planning to do with it? Besides some hefty trimming (at least USD450m + interest worth). As Bloomberg points out, they had to deal with low value of the paper they have, recently:

Cerberus shelved a planned initial public offering for NewPage last year, citing market conditions. The owner of U.S. carmaker Chrysler LLC bought the papermaker two years ago for $2.3 billion.

Through the transaction, Stora will obtain 19.9 percent of NewPage, which will be headquartered in Miamisburg, Ohio. The holding “is considered as a financial investment and accounted for as an asset held for sale,” according to the statement.

That’s NewPage Holding Corp., the largest maker of coated paper in the US, also owned (held?) by Cerberus.

Apropos the decline in newspaper sales: (a) they’re shit – maybe if newspapers went back to being any good (someone please, please start a real national newspaper), they’ll (thank you, Hilary) sell more; and (b) Ted Rall worked that one out, too (go visit his site and read his wonderful comics):

Ted Rall

Basic economics. I’m sure what becomes of the NewPage and Stora paper mills will be anything but.

Everything up against the dollar. Even Bernanke.

While I wait for dinner to finish, and before doing some actual work. Following on from this morning’s post, and why I thought the US would face the ForEx exposure problem first.

The euro hit an all-time high against the dollar Wednesday, rising above $1.39 amid speculation that the Federal Reserve will soon cut key interest rates as much as half a percentage point.

The 13-nation euro rose as high as $1.3914 in trading in New York — breaking through its previous record $1.3852, reached on July 24. That compared with the $1.3832 a euro bought in New York late Tuesday.

In fact:






Expansionary Monetary Policy

That report strengthened speculation that the Fed will lower its target for a key interest rate at its Sept. 18 meeting. A cut from the current rate, 5.25%, would be the first reduction in four years.

The new dollar low came as “traders continue to second-guess how (Fed Chairman Ben) Bernanke and his team will act” next week, said James Hughes, a market analyst at CMC Markets.

Lower interest rates, used to stimulate the economy, can weaken a currency by giving investors lower returns on investments denominated in the currency.

Bernanke offered no hints during a speech in Germany on Tuesday.

“The fact no mention of monetary policy was made in yesterday’s speech in Berlin has done little to placate the market, and we’re also seeing growing speculation that the Fed may elect to cut rates by a half a point as they try to steer the economy away from recession,” Hughes said.

Two problems. First, Monetary policy is a slow-moving kind of deal, but it seems like this recession we’ll have to have is quite near. I don’t see rates getting us out of it, unless the Federal government is going to buy up all the dodgy loans and never foreclose on people. Then, maybe. There is always Fiscal policy – I wonder why that isn’t discussed (rhetorical. Sit tight for that one).

Secondly, the problem isn’t an ordinary slowdown, it’s a fundamental cock-up in the financial market, which the Fed will only reward and worsen, if it lowers rates. The problem was caused by the people who’ll benefit first from the rate cuts, while the people who need the help will be unlikely to do more than be sold a deeper hole into which to dig themselves (as they surely will).

Bernanke will never give a hint, and I don’t know why ‘the media’ persist in pretending we should expect him to. Macroeconomic policy, particularly Monetary policy, works best when we don’t know it’s coming. Daylight itself couldn’t get between us seeing Bernanke heading a certain direction, and rushing there ourselves to beat him to it and make a bundle of money. Personally, in this instance, with these problems, he should however just state, very forcefully, that bailing out one-way-Wall-Street-ers is not his job, and that he is the Federal Reserve Chairman: he can make his own decisions. The principle of Central Bank Independence applies to financial wankers, too.

Now, about those exchange rates.

Interest Rates and the Exposure to Foreign Capital

Why can’t expansionary Fiscal policy be applied to this problem? It would work faster, and incomes in the US have gone almost nowhere in several years, now. It seems sensible to push them up. A little inflationary pressure won’t hurt, if it came to that. Petrol and food are going up, but it seems housing costs are about to slide a little.

So, about Fiscal policy. The US budget deficit, even with its false ‘drop’, still doesn’t much have the slack required for much expansionary policy, nor does Congress seem to have any sort of taste for it (war funding appropriations seem not to count).

The shortfall in US current accounts needs to be met by foreign capital inflows (i.e. borrowing, or sales of US assets to foreign entities):

That’s over a couple of billion dollars a day of capital inflow, and the US keeps that with high dollars and competitive interest rates, assuring lenders a good return on investment in the US debt. Only, that dollar is sliding admirably, meaning if you lend the US money now, chances are it will be worth less in a year, because the USD value of US debt will be worth less. As we speak, the world is shedding their holdings of US debt.

The days of the dollar as the world’s “reserve currency” may be drawing to a close. In August, foreign central banks and governments dumped a whopping 3.8% of their holdings of US debt. Rising unemployment and the ongoing housing slump have triggered fears of a recession sending wary foreign investors running for the exits. China, Japan and Taiwan have been leading the sell-off which has caused the steepest decline since 1992.

o some extent, the losses have been concealed by the up-tick in Treasuries sales to US investors who’ve been fleeing the money markets in droves. Investors have been trying to avoid the fallout from money funds that have been contaminated by mortgage-backed assets. Naturally, they bought US government bonds which are considered a safe bet. But that doesn’t change the fact that the dollar’s foundation is steadily eroding and that foreign support for the dollar is vanishing. US bonds are no longer regarded as a “safe haven”.

What is needed, to keep US debt attractive? Higher interest rates. Hence Bernanke’s problem, and one I’m terribly glad is not mine. His economy needs low interest rates, but his economy also needs high interest rates. As his economy slows, the dollar depreciates – and both of those needs become greater.

Not to mention, of course, his Chinese problem: speculators. He is not in charge of only a domestic economy. That would be much too easy. Foreign capital can fly in and out more and faster than ever before, and he can’t help what trillions of dollars floating the globe, looking for a place to land, might do. Directly or indirectly.

Bernanke will, may, eventually, soon, face the crunch: an insistence by both foreign capital and domestic that he will align Fed policy with them. And he can’t do so for both. If he’s tempted to try, I hope he has a friend nearby to smack him over the head with an article about Chancellor Norman Lamont.

The Pound Sterling once crashed out if its trading market, and there’s really no reason why the US dollar can’t, too.

Bernanke is in fact probably taking his best bet: stalling, keeping both sides from reacting too negatively too quickly, hoping for a quick recession and a quick re-interest in investing in US debt, and hopefully with the US dollar still the world’s choice for ready cash.


  1. The US dollar is down while foreign economies are doing well. The combination of exchange rate differentials and GDP differentials means that US exporters should fare quite well, giving the US economy some boosting, as it goes (remember: AD = C + I + G + NX).
  2. With debt in US dollars, as the dollar slides so does the debt. Possibly tempting the escalation of debt and budget deficits – practically a catastrophe – but currently helping out a little.
  3. The interest in Federal securities in the US. We’d prefer investment in US firms, but it seems those don’t exist anymore – there’s just a Freak-Field Of Credit Instrument Bundles to buy. One of the reasons the debt under Reagan wasn’t as bad as the debt under this Bush is that it was sold to Americans – so it was American assets, and American savings, so American wealth. Foreign-owned debt is simply a drag on the economy, so any extra domestic ownership should help.

As Goes Private Equity, So Goes The Bottom Of The Dow

Finally (I’ve finished dinner while typing, but I really need to Get To Work): the interest rate problem, the credit crunch, call it what you will. Evidence abounds of a serious problem with the Ordinary Private Equity Machine. The existence of this machine, lurking, waiting to pounce on declining stocks of Rescuable Companies, has played a big part in keeping Wall Street up, by keeping stocks from truly failing the old-fashioned way. Almost no industry stock could even decline for long, without pre-buy-out speculation pushing the price back up.

Stocks that were of little practical worth, potentially, were as popular as stocks of companies that were still, you know, good.


Private Equity’s buy-outs were leveraged buy-outs, and they’re having more and more trouble raising debt to pay their average 14.7 times earnings (2002 average: 3.8 times). Meaning sliding stocks slide. And the Dow with it, and Wall Street with that. This is the natural order of the stock market. Indices advance, then they retreat, then advance again, always moving onwards, roughly with inflation but a bit faster, increasing wealth. We were so enamoured of our own wealth and genius that we forgot you can’t beat that one. Gravity always wins, just like the song says.

It isn’t a fucking cash machine in the lobby of Goldman Sachs that never dries up, but we were so sure that we beat inflation during the Clinton years that we forgot about that part. We forgot about taking our lumps and taking long views, because we were so busy buying and selling CDOs, pushing them onto idiot pension funds and chasing ever higher yields, while nobody with any sense stood in our way.

A fabulous city of Xurbs unfolded, and all we needed was cheap credit and cheap oil. Well, a funny thing happened on the way to the car, this morning…

So that’s my big picture, however incomplete. Like I said, I’m just glad the problem isn’t mine to try to solve. This blog will need an inflation tag, soon. Possibly a recession one, too. I hope not. We can, still, skate very close to it and survive. Speculators are always the ones who always end up Tilting, the bastards.

Final solution (no, not that one). China is, whatever her other problems, growing ever more wealthy. Find out what they want, find out what, of that, we have a comparative advantage in, and start producing it as quickly as we can. Even a small share of such a market could carry an economy. Just a thought.

Bush fails to calm battered stock markets

To think I’d just said the economy was boring! This, by the by, is my favourite of the stories making up the pictures.

The White House last night made a concerted attempt to inject fresh confidence into the world’s battered stock markets as share prices suffered a new day of falls on fears that a credit crunch will end an era of cheap funding for corporate takeovers.

With Wall Street down 100 points in early trading after Thursday’s 311-point plunge, Mr Bush and his treasury secretary, Hank Paulson, downplayed fears of contagion from the crisis-ridden real estate market and claimed that the US economy was strong.

Are they out of their fucking minds? For a start, nobody with actual money at risk is subsequently stupid enough to believe either (i) the canard about sub-prime mortgages being contained (will Greenspan please bend Bernanke over his knee and give him a good hiding?), or (ii) that the Bush administration can manage anything, ever. Hell, while a good economy and two odds-on favourite wars go to utter shit around them, they’re busy cooking up arms deals with the Saudis (nothing at all to do, I’m sure, with the weird sale-price they got on Saudi Aramco oil, a week or two back).

You’ll note that deal sells advance US weapony to “Saudi Arabia, other Arab allies of the United States and to Israel”. Thanks for all the hard work on peace in the Middle East and keeping down the proliferation of weapons, you bastards. It also includes “allies of the United States” such as Egypt – whose relative lack of those freedoms and democracy we’re exporting Bush and Rice themselves have criticised, repeatedly. At least now we’ve given them the weapons with which to fight back.

So here’s a tip for the White House: you guys don’t seem to have any sense of shame or, say, reality. But when everything from equity deals to hedge-fund-speculated commodities to housing to the risk profile of banks is tipping over, it’s best not to go on television, spewing pure fantasy and generally appearing like desperate, shrieking incompetents are at the helm of the ship of state. That might work with Fox News and CNN, but you’ll find the Stock Exchanges of the world are populated by intelligent people, not shills and hacks. This isn’t MSNBC’s bloody Trader Talk; it’s the actual traders.

So that was interesting. Meanwhile, more and more, writers are pondering aloud about Big Ones (market crashes, not Aerosmith albums). I never particularly gave this credence, given the differences (the biggest being that the Big One was a crash in value – actual value – rather than what had been occurring here), but those differences aren’t so stark anymore:

  • According to Moody’s, 2.5 million first mortgages will default this year. Delinquencies should peak in the summer of 2008 at 3.6% of all outstanding mortgage debt, up from 2.9% in the first three months of 2007, and it won’t get better until 2009. That’s driven by sub-prime and Adjustable Rate Mortgages, and it will most certainly affect everything from auto sales to garden hoses to curtains.
  • New and Existing homes drift forever (and sometimes sharply) downwards – meaning the stocks of building companies are taking a hit. Shares of major homebuilders plunged to the lowest in almost four years after D.R. Horton Inc. and Beazer Homes USA Inc. reported losses totalling $US1.47 billion on lower sales and huge write downs of unsold land and houses.
  • As bond sales go awry, and as lenders of money are unable, increasingly, to sell that debt on as bonds, banks are stuck with bonds and other debt that nobody wants, increasingly junk-rated and likely to vanish anyway. Shares for Deutsche Bank and Citigroup, among others, fell 5% and 4% respectively yesterday.
  • Oil is, ultimately, down (I’m not eating my hat yet – or is it crow?) a couple of cents, as hedge funds drop their investments in them. So is gold, copper, nicel, etc. (Australians: this will effect immediately the value of the commodities boom, not to mention the Australian Dollar, which is already down).
  • Sadly, even things like the Wesfarmers purchase of Coles Group, which I loved, are in great danger. Wesfarmers, you will recall, was doing it old school – straight cash and share offer. Well, their share price is off the cliff. Meanwhile they’re the only buyer, though – the other bids were from Private Equity, who ultimately couldn’t find a loan-bridge-er to back their play. So Coles Group can look forward to their value tanking, too.
  • If the US sneezes? Euro is down, AUD and others are down. Our All-Ords (Australia’s Dow Jones, if you will) lost ground, while Asia had it’s worst week in a year, as the S&P 500 has its worst in 5 years. Canada’s week was the worst in 6 years. Bloomberg tips US stocks to fall 10%, based on options trading.

There are two things at work: one is Bloomberg’s Housing Recession, which is properly heading for being an Actual Recession; the other is the capital markets, or credit crunch (a term that, for some reason, I really do not like). Capital drying up means more and more Private Equity deals are falling through – meaning that, if these aren’t likely to come through, or even come up, shares that are declining will continue to decline, because the expectation of an Equity buy-out won’t exist (and this has been fairly key in keep the paper value of a lot of firms buoyant – like Coles Group). Every story, lately, talks about risk aversion being nearly at its lowest – and it probably isn’t finished.

So, what? Nothing, really. Returning to Moody’s, their Moody’s In the News is a telling list indeed:

Moody’s in the news

Stocks down, currencies tied to the US down, housing down, etc. The only ‘up’ news came from the government – meaning it was a pitch, not a story.

In some good news, the US economy did go a little ahead of predictions, based on exports (that low US dollar), commercial and government spending. Commercial contruction, though, won’t last. The durable goods numbers are down, when aircraft, cars and trucks are removed, indicating that commercial investment is down. Government spending can only last while government borrowing can last – i.e. not forever. Exports might hold, though. Remember that old Macroeconomics equation:

Aggregate Demand = Consumption + Investment + Government Expenditure + Net Exports

Aggregate Demand also is Aggregate Expenditure and Incomes.

Consumption is already falling, thanks to the housing problem; Investment looks like it is declining, and ought to anyway, as consumption catches up and the credit problem fills out. That leaves Exports, at the mercy of the US dollar (which can’t be allowed to decline too far, because you need it for your borrowing – a complication that has upward pressure on US interest rates, which will hurt the economy further), and Government Expenditure, which (i) is already too large, relative to income, and (ii) is yet, to me, to be undertaken at all competently by the Bush administration, who seem never to have taken a Macroeconomics class in their collective lives.

Gets messy, doesn’t it? And what picture are these thousand words (no, I did not count them) worth?

Dow Jones:


S&P 500:

S&P 500

Which may as well be the FTSE100, the EUROFIRST 300, the NIKKEI, the ALL-ORDS. Take your pick.

CNN indices

A stroll through the S&P Goldman-Sachs Commodities Indices will give you the same losses or volatility in returns on cocoa, coffee, corn, gold, industrial metals, you name it. It’s a long list.

The Big Picture blog is also looking specifically at how – relevant to the rose-tinted press conferences being given – the US economy has lagged the world by a good long way for a good long while, now (we use the terms “Bush Boom” with not a little irony. Or sarcasm, it kind of depends on the tone).

What happens in private equity stays in private

This is a relatively link-free post, sorry. I’m waiting for a break in the rain to bolt to the laundry. Or to do the laundry, whichever is the common usage in your country.

Movement on both sides of the Atlantic. In yesterday’s Financial Times, the leading opinion piece discussed taxation (or effective lack thereof) of many private equity gains.

The fair way to tax private equity

The United States, even in its present mood of economic discontent, is less given than most countries to outbursts of animosity against the working rich. But strength of feeling on the subject is driven by the fact that the tax treatment of these managers, as compared to the treatment of other very highly paid individuals, really is anomalous. Take the anger and disgust away, and disinterested considerations of efficiency and fairness urgently demand a change.

To tax carried interest as ordinary income when granted would require an options-based valuation, which is not straightforward. Another complicated remedy would be to treat carried interest as an interest-free loan from the fund’s investors, and then collect tax in two parts: on the interest forgone, taxed as ordinary income, and on the subsequent capital gain, taxed at the lower rate required by current law. The simplest approach, and most likely the best, would be to set the question of deferral aside, and tax carried interest as ordinary income on realisation. To emphasise, this would not be to single out private equity or hedge fund managers as deserving of a new or specially punitive regime. It is a matter of even-handedly applying the logic of the present code.

For another day are bigger questions of whether it ever makes sense to tax capital gains at a lower rate than ordinary income (the policy that gave rise to this problem in the first place) and, in the American case, whether the tax system as a whole should be made more progressive. The case for reform on both points is strong, in fact. But the carried interest anomaly can be dealt with promptly, and should be.

They get to use ‘fair’, since it’s an opinion piece – although the suggestion to treat carried interest, which is basically income, as income, counts as fair in my book. Sorry, Dave.

The key, amongst the rough, is that private equity should not be taxed punatively for the money it makes. That Equity chiefs can admit to paying less tax than their cleaners is certainly an indication that something needs repairing, but the fact that some such chiefs are taking home more than USD1bn in salaries should not make them special targets. Just properly-targeted targets. Heh.

This is a legitimate issue, though, for once. It is not merely a straw-man employed by Wall Street Journal wankers to insist we’re all commies. Talk of a Private Equity Tax Rate is, unfortunately, being heard (whether it is being heard in earnest, or is from inception that straw man, I do not know. Frankly, either is a needless waste of time). Private Equity should not face a specific higher tax rate. Income should be properly identified, and taxed appropriate to society’s wishes. As long as the income is earned legally, its source should not warrant special attention. I’d sooner see New York City slumlords taxed to hell and gone before Private Equity, anyway.

In the UK, meanwhile, which is closer to actual action, little action, in fact, has resulted from all those entertaining committee meetings (i.e., the meetings were entertaining. They were meetings of the Treasury Select Committee on Private Equity, not the Entertainment Committee, or anything. Come on, that was hilarious). From – where else – the Guardian:

Private equity firms yesterday escaped the threat of tighter regulation and demands for closer scrutiny of pay and fees after a review rejected imposing public company-style rules on the industry.

In a consultation document, Sir David proposed a code of conduct that he said would greatly increase the supply of information to employees, customers and other stakeholders of the firms private equity acquired.

The code should be voluntary, he said, though he hoped some 200 large private equity buyout firms based in London would adopt it. He expects to produce a final report in October ahead of a review by the Treasury of allegations that private equity firms have been abusing tax rules to enrich their senior executives and investors. A further review of the industry will be completed by the Treasury select committee in the autumn.

Unions are not happy:

Unions said they were disappointed with Sir David’s report and it would fail to alleviate the fears of workers at private equity-owned companies. The GMB and other unions have accused private equity firms of profiteering at the expense of workers and the taxpayer through unfair tax breaks, asset-stripping techniques and anti-labour practices.

The TUC’s general secretary, Brendan Barber, said: “It will do little to reassure the staff of private equity takeover targets that the quest for short-term returns will not continue to threaten their jobs, pensions and working conditions.”

Personally, I don’t see that Public Company Rules would have done much to protect workers anyway, but this a game, and whatever keeps one’s opponent on their back foot would be welcomed. The secrecy surrounding the industry – who’s in, who’s making money and how much, the little details about financing and leveraged buy-outs that would land football clubs in a lower division, for example, is an issue that I had hoped the committee would manage. At the moment they have kicked this one for touch (Americans: they ‘punted’).

A later review, mentioned in the article, keeps the fire somewhat lit, but I won’t hold my breath. I would say that Private Equity can call this one a win. Moreso if it means greater room to maneouvre with the US Congress, when it comes time over this side (assuming Congress ever gets anything done again).

Looking the code of conduct over, it is essentially the equivalent of what is required of public companies, but it isn’t required. Just politely suggested. Mind you, given Private Equity’s fascination with not being villainised, they ought to, and most likely will, go in for at least some of the recommendations.

This, by the by, did not touch on the matter of tax paid on income earned via carried interest. So legislation shutting that opportunity down is probably – should be – on the cards, both in the UK and the US. And anywhere else it is employed.

Private equity to pay higher price for done deals

Keeping with the costs of doing the business of Private Equity. You will recall I mentioned the Wesfarmers’ buy-out of Coles Group (the reassuringly old-fashioned one). I commented at the time that two other groups, headlining Blackstone and the Carlyle Group, had failed to find lenders for their bids for the Coles Group. Well:

Private equity firms can now be in no doubt that they are going to have to pay more to fund the debt for buy-out deals they have already sealed.

This week alone has seen two of the biggest deals on either side of the Atlantic – buy-outs of Alliance Boots and Chrysler – forced to increase the premium, or interest rates, on loans they are trying to sell. Bankers in a flurry other deals have had to act likewise.

This means it is going to cost the US carmaker, which is being bought from DaimlerChrysler by Cerberus, the private equity group, an extra $20m annually to service this debt, plus whatever it has to give away in discounts, which could be another $20m up front.

On the same day it also emerged something similar was going on at Alliance Boots, the record UK leveraged buy-out, which is seeking some £9bn worth of loans from investors.

The changes are likely to cost anywhere between an extra £15m and £31m annually, according to investors’ expectations, plus some more in terms of fees.

However, it is not yet certain that even this will be enough to get the buyers in. One London-based investor said he thought the Boots loan had little chance of getting the commitments it wants from investors by a tentative deadline on Friday.

It goes on to other deals, similarly afflicted (it’s worth the read). Couple that with the news that financial offerings are becoming less popular with ordinary investors (another ripple in the pond from that sub-prime skipping stone), and a picture forms, thank you Mr. Squiggle (Brits: think Rolf Harris. Americans, I don’t know. I’ll ask my wife), of a market that is coming to remember that debt has risk attached.

If only the re-awakening would extend to casinos and bloody pokies (Brits: fruit machines. Americans: slot machines), I’d be ecstatic. Not just regular ecstatic. Just-been-told-Joss-Whedon-got-the-cast-back-together-for-5-more-seasons-of-Firefly ecstatic. And if you don’t get that reference, you’re God’s problem.

Ethical investing

I spotted a story related to this many days back, now, in the Financial Times. It pertained to the performance of so-called ethical funds (interested? Check out Ethical Corporation, a pretty decent news magazine following ethical corporations/investing).

From the Financial Times:

Large ethical companies consistently outperform the market, according to a survey of corporate social responsibility by Goldman Sachs, the investment bank.

The study found that companies on an ethical list compiled by Goldman outperformed the MSCI World Index by an average of 25 per cent, with 72 per cent of companies outperforming their sector peers.

Most existing ethical indices, such as the Dow Jones Sustainability Index and FTSE4Good, have underperformed the stock market average since 2000. Goldman claims this occurs because the indices are based on ethical environmental, social and governance (ESG) factors in isolation.

The GS Sustain focus list instead identifies ESG measures relevant to specific sectors, such as energy or pharmaceuticals, and combines them with other indicators of performance.

Honestly, FTSE4Good? Who came up with that?

In any event, good news – kind of. There’s still, at this point in time, some space between public and actual committments, not to mention intentions, actions and results. It’s still better, to be sure, than a story about how shit the returns are on ethical investments. The story ends:

However, the survey reveals a big gap between good intentions and corporate practice. While three-quarters of chief executives said ESG issues should be embedded into company strategy and operations, only 50 per cent thought their company did so.

And half of those are probably wrong, anyway. As luck would have it, though, the scope to make money off this is expanding – and legitimately, rather than just taking berks ‘going green’ for a quick ride. Today’s Telegraph has an article about some recent work that found no link between polluting and making profits (the idea within us all is that it’s cheaper to pollute; seems this might not be the case, after all):

There is no link between companies’ pollution levels and profitability, which should push fund managers to opt for greener companies, according to a study.

Trucost, which monitors environmental output, said it found for a second year running that the worst polluters were not necessarily the best in their sector.

The absence of a link should encourage fund managers to opt for environmentally friendly companies because of the increasing likelihood that governments will impose financial penalties on heavy generators of carbon, Trucost said.

If you’re a potentially ethical investor, give Trucost’s website a looking-over, also. Ethical Corporation, also, has a very good article encouraging you.

Purely in terms of opportunity, consider this: oil prices are increasing, but the costs of finding increasingly less oil are also increasing (I don’t read the Oil Drum for nothing). No sooner will alternatives, however small, be found, than the value of those endeavours will fall, and with (probably, to my mind) little in the way of salvage to be had.

Meanwhile, everything from biofuels to photo-voltaic cells in vespas are attracting capital – whether they’ll pan out or not. Will bloody oil shale be likely to pay off even close to as highly, or reliably? The likes of Fidelity Investments and Climate Change Capital are pushing climate change as the moving markets – and why wouldn’t they be?

“There are five major market trends that we believe will develop over the next five years that will be a result in climate change,” said Mark Woodall, chief executive of Climate Change Capital – an investment banking group specialising in opportunities created by a low carbon economy.

He highlighted these as:

  • Consolidation of existing segments such as wind power
  • Growth of commodities such as biofuel
  • The identification of the low-cost countries that will mass produce these technologies
  • Stop-gap technologies that may not be the ultimate solution but will be in demand in the short to medium term, and
  • Adaptation technologies, which will help us live in a world altered by climate change.

In the first four months of 2007, ethical funds sales rose 83 per cent compared with the same time period in 2006, figures from Fidelity Funds Network reveal. If this trend continues sales for 2007 are set to double those of last year.

Read through that zerocarbonbritain report, about which I wrote yesterday, and consider where the money is to be made: getting in before these green-cottage industries take off, or investing in a machine that makes Russia nicer about sharing their oil.

Private Equity still troubled by the ‘image’ thing

From the Financial Times: there is a list (the list was put together by the Economist’s Economics Intelligence Unit. Now, I don’t like the Economist, and the fact that the EIU has a stupid name and puts its stupid work behind a stupid pay-per-view wall does little to help my prejudice. Also, I really doubt they care).

This list is of Private Equity-friendly countries, based on 42 criteria from strength of the judicial system to political risk.

“After years of obscurity, private equity has been thrust into the limelight and it is likely to stay there,” said Martin Halusa, chief executive of Apax Partners, in a report ranking countries on how easy it is for private equity to operate there.

“Waning policy support in many European countries is already having a subtle impact on the rankings; if the backlash continues, it will surely have a more pronounced impact on the rankings in years to come in what is a global and highly mobile industry,” said Mr Halusa. The warning comes after buy-out titans appeared this week before a Commons committee investigating private equity’s privileged tax position.

There’s more!

While the “industry is in the pink” with new assets rising by 38 per cent last year and returns by the top 25 per cent of funds reaching 37.6 per cent, the report says “all is not well” for private equity in its biggest markets. “Public and political opinion in some countries has turned against private equity in recent times and the industry stands accused of secrecy, asset-stripping and profiteering,” it says.

Those are strong accusations. They must have been reading my blog. Or this blog. Or this blog. Or almost anything being written about them since Bear Stearns’ funds tanked (Calculated Risk, by the by, has a cool post up just now on Wells Fargo).

England is simultaneously the best market and the biggest challenge, it appears:

The UK is the most developed market with private equity raising funds equivalent to more than 2.5 per cent of its gross domestic product, well above the US and France, where funds raised are equivalent to about 0.5 per cent of GDP.

Yet Britain has been gripped by a wave of anti-private equity sentiment, sparked by controversial bids for household name companies such as the Alliance Boots pharmacies chain and the AA motor breakdown service.

“This political and media onslaught has certainly exposed a lack of preparedness and PR savvy,” said Mr Halusa. “Most crucially, the industry has not been adequately geared up to answer critics with robust data on its overall economic and social impact.”

I had a comment on a previous post by someone ‘in’ Private Equity, saying pretty much what this article identifies: that Private Equity in England (and, we may surmise, continental Europe) are doing a pretty poor job selling themselves. He (or she) recommended something better than trying to win over the public – aggressive lobbying to get MPs off their backs in the first place.

Me, I would really like to see this list. Having commented about American automakers are bigger/better Private Equity targets than Japanese automakers, based upon little to know actual deduction or economics, I’d like to see where Japan is ranked.

Auto response: me to the market to Detroit


NEW YORK (AP) – Shares of the Detroit-based automakers fell Thursday in the first day of trading after all three reported drops in June U.S. auto sales.

Yes, the big three American manufacturers were punished today, right from the bell:




With only GM making some real ground back after lunch. Seems we still like the moves GM has been making with it’s division sales – Allison Transmission and Delphi. The Japanese automakers we discussed on Tuesday also lost ground – it seems we’re also not interested in them having bigger pieces of a smaller pie (they’re also not likely to be targeted by Private Equity – a factor in GM’s popularity, I think. I must look at what else they have that they might sell?).




Their suppliers didn’t hold up much, either.

Should be good. There’s no indication that Private Equity is done with the Auto industry just yet, and each piece of news like this just makes them incrementally bigger and better targets.