Archive for the ‘Private Equity’ Category

What do Mitt Romney and Steve Jobs have in common?

May 23, 2012

I love the irony when it’s revealed that a villain and a hero are found guilty (innocent?) of similar deeds.

Past couple of weeks, Team O has been pouncing on Mitt & Bain for the evil done by private equity firms.

And, for years, Steve Jobs has been revered for his magic at Apple.

Here’s an interesting snippet from an NRO article: Praise Private Equity

Just months before Romney’s career at Bain Capital became controversial, Americans mourned the death of Apple CEO Steve Jobs.

And yet when Jobs returned to Apple in 1997, Jobs returned as an angel of destruction. He fired over 3,000 employees, a move that helped swing Apple from a $1.05 billion annual loss to a $309 million profit.

He shut down Apple’s manufacturing facilities and outsourced almost every aspect of production.

He swung the axe pitilessly, since he was convinced that survival requires leanness.

And in the 14 years after Jobs returned, employment levels at Apple soared.

Apple’s manufacturing work force was eventually replaced by engineers, support staff, and — in a move that would have surprised many in 1997 — a vast army of retail employees.

The destruction was a prerequisite for the creation, and for the transformation of a wounded technology firm into one of the world’s most valuable public companies.

And, oh yeah, Apple is insanely profitable … and pays no Federal income taxes.

Jobs is good; Romney is bad.

Hmmm …

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Re: PE firms … some academic findings.

January 13, 2012

Punch line: Private Equity has found itself under the media spotlight the past couple of days, thanks to Newt’s shots at Romney.

At the risk of burdening the hysteria with facts, here are the results of some academic studies reported by Business Week

PEs most common strategy is simple: buy an undervalued company, usually with borrowed money to juice returns. Whip it into shape. And after five years or so, sell it back to the public, paying off the debt and keeping the profits.

Private equity firms genuinely unlock value through “strong incentives to management, strong oversight, and operational consulting.” They force bad managers and deadwood employees to look elsewhere for work.

The PEs also benefit from special tax breaks, including the “carried interest” rule that allows them to treat their profits as lightly taxed capital gains.

More specifically …

  • According to Preqin, a London-based data provider, 25 percent of the dollars going to private equity funds from 2009 to 2011 came from public pension funds. That included teachers in Texas, California, and New Jersey. A second big chunk of investment comes from college endowment funds
  • Studies show that private equity firms are excellent at generating returns for their investors … An analysis of 598 buyout funds that existed between 1984 and 2008 found that even after fees, their weighted-average returns to outside investors were 1.27 times the returns on the Standard & Poor’s 500-stock index over the same periods …
  • A Harvard Business School working paper looked at the employment patterns of 3,200 firms targeted by private equity from 1980 to 2005 … the study concludes that in comparison to the control group, the PE firms’ employment shrank “less than 1 percent” in the two years after a deal.

Ken’s Take: The emerging backlash against private equity will likely have some  unintended consequences.

Question: What if the PEs stop investing in failing companies because they get skewed if they either do the necessary restructuring (i.e. shutter plants and jettison deadwood employees) or fail to turn the failing firms around.

Answer: The failing firms fail and all jobs are lost … or the Feds step in and make taxpayers subsidize inefficient, non-economic businesses.

I’d rather have PEs take the risk with private capital …

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What’s private equity without equity? hmmm…

June 4, 2009

When money was cheap and freely available, private equity firms were among  the (unregulated) darlings of wall Street.  My, how times have changed.

KKR – one of the biggies – was (is) planning an IPO. business overview.  So, they provided a public overview last weekend. 

CNBC reports:

KKR had an adjusted pre-tax loss of $1.19 billion in 2008 while its assets under management dropped by 11 percent.

The firm still has $15 billion in capital it has yet to invest in deals, but …  “Given that private equity can’t get financing for deals of more than $2 billion if they’re lucky, it could be a while until KKR works off all that capital. PE firms exists to raise money for new funds, reap the fees from those funds and quickly deploy and return the capital raised. … It’s fair to say that right now the model isn’t working that well.”

And KKR has mucho unrealized losses from the investments it made during the LBO crazed days of 2005-2007.  For example,

“Its deal to acquire First Data in September of 2007 which cost $2.325 billion is now worth almost a billion less at $1.395 billion

The world’s biggest private equity deal, the acquisition of TXU has seen the value of KKR’s equity stake decline by exactly 50 percent from $1.817 billion to $908 million.”

And it all seemed so easy …

Full article: 
http://www.cnbc.com/id/31049647