Private Equity

... and here are the facts!

• Debt Fuels a Dividend Boom - Firms Collect Payouts, and Investors Get Yield; 'Reminiscent of the Bubble Era' (WSJ)
• Black Monday Echoes With Computers Failing to Restore Confidence (BBG)
• Poll: Obama Leads in Wisconsin, Iowa (WSJ)
• Gold Imports by India Seen Climbing First Time in Six Quarters (BBG)
• Europe pushes ahead towards ECB bank supervision (Reuters)
• ... And fails: Summit fails to agree timetable for aid to failing lenders (FT)
• Toyota Prius Dominates California as State’s No. 1 Model (BBG)
• Italy raises €18bn in huge bond sale (FT)
• Diplomacy inbox fills up as U.N. awaits U.S. presidential vote (Reuters)
• Goldman braced for more revelations (FT)
• China power brokers agree preferred leadership team (Reuters)
• EU, Japan Warn Against New US Swaps Rules (WSJ)
• Why VaR is the most meaningless contraption ever: Morgan Stanley shows the ‘flaky’ side of model (FT)
• Made in France Trumps Consumer Choice in Hollande Jobs Quest (BBG)
• North Korea threatens South over propaganda balloons (Reuters)

• Germany will pay Greek aid (Spiegel)
• Spain Banks Face More Pain as Worst-Case Scenario Turns Real (Bloomberg)
• China’s Growth Continues to Slow (WSJ)
• Executives Lack Confidence in U.S. Competitiveness (WSJ)
• Poor Market Conditions will See 180 Solar Manufacturers Fail by 2015 (OilPrice)
• Wen upbeat on China’s economy (FT)
• Gold remains popular, despite the doubts of economists (Economist)
• Armstrong Stands to Lose $30 Million as Sponsors Flee (Bloomberg)
• IMF urges aid for Italy, Spain but Rome baulking (Reuters)
• EU Summit Highlights Financial Divide (WSJ)
• FOMC Straying on Price Target, Former Fed Officials Say (Bloomberg)
• Putin defiant over weapons sales (FT)

The primary, if not only, reason there has been a brief spike in subsidized demand for housing in recent months, has been the GSE/FHFA endorsed REO-To-Rental plan, and associated securitization conduits, in which large asset managers have been encouraged to take advantage of government funded, risk-free financing (and entirely bypassing banks who have given up on loan origination due to legacy liability issues which have every bank tied up in litigation from now until Feddom come - just see today's Bank of America results) and purchase foreclosed properties in bulk, with the intention of converting them into rental properties. Needless to say, the subsidization of this wholesale purchasing of foreclosures, coupled with the ongoing "foreclosure stuffing" pursued by the big banks (as a reminder days to foreclose in New York just hit a record 1,072 per RealtyTrac as banks simply refuse to clear housing inventory faster knowing full well withheld inventory is an additional clearing price subsidy) is the main reason why the punditry has been confused into believing there is a housing rebound. That this "rebound" is merely a subsidized demand pull phenomenon a la the "cash for clunkers" auto sales program is patently clear to most. Nonetheless what little confusion is left, is finally coming to an end, thanks to none other than one of the first entrants in the REO-To-Rental space, $31 billion hedge fund Och Ziff, which a year after entering the program with hopes of quick riches, is now looking to cash out.

• Obama takes offensive against Romney in debate rematch (Reuters)
• Obama Says Romney Words Aren’t ‘True’ in Second Debate (Bloomberg)
• Obama takes Romney head-on in debate (FT)
• And another joins the club: Thailand Unexpectedly Cuts Rate as Global Outlook Worsens (Bloomberg)
• PBOC Injects Less Cash (WSJ)
• Japan to Hold Special Cabinet Meeting After Economy Downgraded (Bloomberg)
• Greek Coalition Duo Reject Labour Moves Proposed by Troika (WSJ)
• Opposition wanes to Spanish aid request (FT)
• RBS to Exit U.K. Asset Protection Plan After $4 Billion Fees (Bloomberg)
• Spain Retains Investment Grade Credit Rating From Moody’s (Bloomberg)
• US diplomat asks Japan, ROK to resolve islands spat (China Daily)
• Stagnation not due to austerity, says OBR (FT)

With 'private equity' discussions sliding for one moment off the front pages, NYTimes' DealBook notes that it appears these 'honorable' job-creating entities were allegedly colluding to drive down the prices of more than two dozen takeovers. During the last decade's buyout boom, according to newly released e-mails in a civil lawsuit accusing them of collusion, the two firms appeared to be on much cozier terms.

"Henry Kravis just called to say congratulations and that they were standing down because he had told me before they would not jump a signed deal of ours,"

 

"We would much rather work with you guys than against you, together we can be unstoppable but in opposition we can cost each other a lot of money."... "Agreed."

• Global easing deluge resumes: Bank of Korea Slashes Policy Rate (WSJ)
• And Brazil: Brazil cuts Selic rate to new record low of 7.25 pct (Reuters)
• With Tapes, Authorities Build Criminal Cases Over JPMorgan Loss (NYT) Just don't hold your breath
• IMF snub reveals China’s political priorities (FT)
• Add a dash of trade wars: Revised Duties Imposed by U.S. on Chinese Solar Equipment (Bloomberg)
• IMF calls for action as euro zone crisis festers (Reuters)
• Dubai Losing Billions as Insecure Expats Send Money Abroad (BBG)
• Softbank in Advanced Talks to Acquire Sprint Nextel (WSJ)
• Lagarde calls for brake on austerity (FT)
• EU lambasts Turkey over freedoms (FT)
• Race Tightens in Two States (WSJ)

• Rajoy’s Deepening Budget Black Hole Outpaces Spain’s Cuts (Bloomberg)
• ECB May Need to Cut Rates Given Deflation Risk, IMF Says (Bloomberg)
• Global Recession Risk Rises (WSJ)
• Romney Leads Obama in Pew Likely Voter Poll After Debate (Bloomberg)
• IMF Sees Global Risk in China-Japan Spat (WSJ)
• Republicans shift tone on taxing the rich (FT)
• Romney casts Obama's foreign policy as weak, dangerous (Reuters)
• Europe Salutes Greek Budget-Cutting Will, Raising Aid Prospects (Bloomberg)
• U.S. Downgrade Seen as Upgrade as U.S. Debt Dissolved (Bloomberg)
• IMF Says Most Advanced Nations Making Progress Reducing Deficits (Bloomberg)
• Eurozone launches €500bn rescue fund (FT)

• Italy rejects need for EU control (FT)
• ‘Worst US quarterly earnings since 2009’ (FT)
• Chinese firm helps Iran spy on citizens (Reuters)
• World Bank cuts East Asia GDP outlook, flags China risks (Reuters)
• Foxconn factory rolls on in spite of strike (China Daily)
• Economic recovery ‘on the ropes’ (FT)
• Japan Tries Cars That Make the Mini Look Maxi (Businessweek)
• Euro Finance Chiefs to Give Positive Greece Statement, Rehn Says (Bloomberg)
• Romney attacks drones policy (FT)
• Euro zone mulls 20 billion euro separate budget (Reuters)
• Hong Kong’s Leung Seeks Turnaround With Economy Focus (Bloomberg)
• RBA Keeps Some Documents Private in Securency Bribe Probe (Bloomberg)
• India Inflation to Remain at 7.5%-8% Till Early 2013 (WSJ)

Standing in Legoland in Carlsbad, California in 2011, fulfilling a promise to my then eight-year-old son William, it hit me. I was strolling around a Blackstone-owned property. We'd woken up in a Homewood Suites, owned by Blackstone-backed Hilton. We'd driven to the park in a rental car from Hertz, owned by private-equity firms Carlyle and Clayton, Dubilier & Rice. Practically every time I'd opened my wallet that day, it had been to a company owned by private equity. Even on vacation, I couldn't escape. A few months later, I had dinner with Greg Brenneman, who'd held top positions at Continental, Burger King, and Quizno's, all private-equity-owned at the time he was involved. Brenneman is now the chairman of CCMP Capital, whose investments have included 1-800-Flowers.com and Vitamin Shoppe. We talked at length about the ubiquity of PE ownership -- my J. Crew sweater, the Dollar General store in my wife's hometown in the Catskills. I started a running list on my BlackBerry that quickly grew to dozens of examples. Brand names piled up, from Toys "R" Us to Petco. The more I looked, the more I found it.  The numbers are staggering. Private-equity firms globally and collectively had almost $3 trillion in assets at the end of 2011. The companies they own account for about 8 percent of the U.S. gross domestic product by one estimate.

• Draghi Says Next Move Not His as Spain Resists Bailout (Bloomberg)
• EU Doubts on Deficit Cutting May Hinder Spain’s Path to Bailout (Bloomberg)
• Merkel to Visit Greece for First Time Since Crisis Outbreak (Bloomberg)
• Fed's Bullard warns inflation won't ease U.S. debt burden (Reuters)
• Walmart Workers Stage a Walkout in California (NYT)
• Natural Gas Glut Pushes Exports (WSJ)
• BOJ Refrains From More Stimulus as Political Pressure Mounts (Bloomberg)
• Big funds seek to rein in pay at Wall Street banks (Reuters)
• Hong Kong Luxury Sales Fall as Chinese Curb Spending (Bloomberg)
• Dave and Busters Pulls IPO due to "Market Conditions" (Reuters) - so market at anything but all time highs now is market conditions?
• Weak U.S. labor market looms ahead of elections (Reuters)
• Glut of Solar Panels Poses a New Threat to China (NYT)

• No Joy on Wall Street as Biggest Banks Earn $63 Billion (Bloomberg)
• And more good news: IMF’s Blanchard Says Crisis Will Last a Decade (Reuters)
• Hobbit Returns to Find Middle Earth Has Become Expensive (Bloomberg)
• Freddie's Foreclosure Plan Hits Roadblock (WSJ)
• Who will buy the FT? Pearson CEO Scardino Will Step Down as Fallon Takes Over (BBG)
• Jeremy Lin Said to Be in Talks With Harvard on Licensing Deal (Bloomberg)
• Jon Weil tears apart the NYAG "prosecution" - Eric Schneiderman Will Have to Do Better Than This (BBG)
• Portugal Offers to Exchange Bonds as It Seeks Debt Market Access (Bloomberg)
• Is unlimited growth a thing of the past? (FT-Martin Wolf)
• European Bank Capital Results Overtaken by Tougher Global Rules (Bloomberg)
• China’s Slowdown Reverberates as ADB Cuts Forecasts (Bloomberg)
• Tokyo has no plan to extend currency swap deal with Seoul (Reuters)

• Trade Slows Around World (WSJ)
• Debt limit lurks in fiscal cliff talks (FT)
• Welcome back to the eurozone crisis (FT, Wolfgang Munchau)
• Euro Leaders Face October of Unrest After September Rally (Bloomberg)
• Dad, you were right (FT)
• 25% unemployment, 25% bad loans, 5% drop in Industrial Production, and IMF finally lowers its 2013 Greek GDP forecast (WSJ)
• Global IPOs Slump to Second-Lowest Level Since Financial Crisis (Bloomberg)
• France's Hollande faces street protest over EU fiscal pact (Reuters)
• EU Working to Resolve Difference on Bank Plan, Rehn Says (Bloomberg)
• China manufacturing remains sluggish (FT)
• Samaras vows to fight Greek corruption (FT) ... and one of these days he just may do it
• Leap of Faith (Hssman)
• Germany told to 'come clean’ over Greece (AEP)

Another interesting trend courtesy of the low interest rate environment created by the Federal Reserve is the feverish chase for yield. In a previous article we discussed that a large part of the higher rental prices were coming from a segment that had lost their homes via foreclosure. Since the housing bubble popped millions of Americans have lost their homes. As the report also found, many of those stayed within the same area but likely shifted to a single-family rental or an apartment. What we did not discuss however is how investors are playing a role in pushing up rental yields as well. As bigger blocks of large investors purchase distressed properties, many add value to the property and try to push rental prices upwards. I saw a presentation a few months ago of some local investors in Southern California purchasing older apartment buildings (some built in the 1970s) and upgrading them to more modern standards. Once the upgrades were complete, these investors pushed rents up by 7 to 10 percent. What impact is the flood of investors having on the market?

Lately, it has become particularly fashionable to bash private equity, especially among those workers in the employ of the state. The argument, in as much as capitalism can be summarized in one sentence, is that PE firms issue excess leverage, making bankruptcy inevitable (apparently those who buy the debt are unaware they will never get their money back), all the while cutting headcount to maximize cash flow (apparently the same PE firms don't realize that their investment will have the greatest terminal value to buyer if it has the highest possible growth potential, which means revenue and cashflow, which means proper CapEx investment, which means streamlined income statement, which means more efficient workers generating more profits, not less). The narrative ultimately culminates with some variation on a the theme that PE firms are responsible for offshoring jobs. While any of the above may be debated, and usually is especially by those who have absolutely no understanding of finance, one thing is certain: when it comes to bashing PE, America's public workers should be the last to have anything negative to say about Private Equity, and the capital markets in general. Why? Because when it comes to fulfilling those promises of a comfortable retirement with pensions and benefits paying out in perpetuity, always indexed for inflation, and otherwise fulfilling impossible dreams, who do America's public pension fund administrators go to? The very same private equity firms that have suddenly become outcast number 1.