This page has been archived and commenting is disabled.

A Glimpse Inside The Industry That Owns Everything

Tyler Durden's picture




 

From Jason Kelly, author of The New Tycoons: Inside the Trillion Dollar Private Equity Industry That Owns Everything - an excerpt

Prologue

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 2011.1 The companies they own account for about 8 percent of the U.S. gross domestic product by one estimate.2

Contemplating how they got all that money in the first place triggered another thought, a memory of a colleague mentioning that her mother was a teacher in suburban Toronto and had her retirement account in the hands of the Ontario Teachers' Pension Plan. I'd profiled that pension for Bloomberg Businessweek in early 2010 -- they were pursuing a strategy of buying companies directly, like vitamin retailer GNC. Thousands of other pensions, endowments, and government funds, from California to Singapore, were committing hundreds of billions to the likes of Blackstone and KKR. I thought of my in-laws, each with a pension. They, and millions of folks like them were, usually unknowingly, owners of dozens of companies on my ever-growing BlackBerry list.

While the business of buying and selling companies is far from new, the emergence of these players was relatively sudden. What began as a cottage industry known as bootstrapping and leveraged buyouts in the 1970s and 1980s, had blossomed in the 1990s as a handful of small players started to grow rapidly and others, eyeing a huge opportunity, hung out their own shingles. Somewhere toward the turn of the twenty-first century, the more genteel "private equity" became the chosen descriptor. The name may have changed, but the basic business model was the same: collect money, pair it with debt, and buy a company with the intent of selling it down the line for a profit.

The period from 2000 to the present changed everything. Small private partnerships accustomed to rounding up a few hundred million dollars suddenly were raising funds well in excess of $10 billion, accepting huge sums of money from pensions and endowments eager for investment returns topping 20 or 30 percent a year. Wall Street became an eager lender, developing new ways to provide the debt financing in order to get the associated fees. Big investment banks took to investing alongside their clients.

All that money meant that almost nothing was out of bounds for private equity, and 2005 to 2007 saw a spate of deals for companies deeply entrenched in the infrastructure of our everyday lives, from hospital giant HCA to credit card processor First Data to hotelier Hilton.  My own introduction was a baptism by fire; I began covering the industry in February 2007. During my first week, news leaked of the biggest-ever takeover, the leveraged buyout of power producer TXU.

What happened next was a different sort of education. Deal making came to a screeching halt with the credit freeze of 2007 and 2008 that triggered the broader global financial crisis. The private-equity managers generally hunkered down, and tried to soothe their own anxious investors pummeled by the public markets -- investors who also were worried about what they owned through their buyout funds. Unlike hedge funds, where a bad trade can mean huge losses, an ill-conceived private-equity deal can linger. When the dust settled, private-equity firms still owned all of the companies they'd bought in the boom.

Emerging from the crisis, existential questions abounded. My Legoland epiphany demonstrated just how embedded private equity was in our everyday lives. What seemed like an arcane corner of finance when I arrived was actually central to all of us and very few people actually knew who they were or what they did.

Reporting and writing about business, especially finance and especially in New York, can sometimes feel like a demented sports beat, simply keeping score and tracking rich people getting richer or marginally less rich. But in this case, that's just scratching the surface. What these guys are doing matters to all of us in some form or fashion.

Private equity by its nature and design, is secretive, a breathtakingly wealthy corner of the world where the names only occasionally escape the business pages, names like Stephen Schwarzman, David Bonderman, and David Rubenstein. The relatively small firms they've created, by virtue of what they were able to buy with those ever-growing pools gave them outsized influence as owners and employers. Blackstone, Schwarzman's firm, alone counts almost a million employees through companies it controls. They are modern day Wizards of Oz -- the men behind the private-equity curtain.

The best way to understand these men is to look at what they've created, and it's startling how much each of the largest private-equity firms are mirrors of the founders themselves. There's an egotism at the center of the whole exercise. After all, each of these men, some more willingly than others, ditched successful careers because they deeply believed they saw something that only a handful of others did. And then they went a step further. They decided to build what have become massively influential institutions meant to outlast them.

To understand what they created and what it means to have them so entrenched in our lives, I decided to follow the money to reveal through their words and actions the implications of their activities to fix actions. The trail begins in the sanitized meeting rooms of public pensions, moves to palatial suites in skyscrapers with top-of-the-world views, and on to discount stores and pizza chains and hotels, before it comes all the way back to those same vanilla pension offices and eventually to the retirement checks of teachers and firefighters and, in one of several twists, even some workers of the companies owned by private-equity firms.

Along the way, that money finds itself augmented by debt and pushed into companies that may thrive, implode, maintain, or simply fade away. The money befuddles Washington lawmakers and regulators, in a debate sharpened by the presidential candidacy of Mitt Romney. His private-equity career has brought the industry into the public consciousness in a never-before-seen way, prompting its largest players to explain themselves with at times surprising candor.

Their contemplation stems not only from a bright spotlight but from their own personal situations. Having created unbelievable amounts of wealth for themselves, they're mulling their own legacies, in terms of the empires they've built and what they'll ultimately do with their riches.

With all the talk of retirement, it's easy to forget the relative youth of the industry. I've come to think of private equity as a teenager with a lot of potential, but still struggling with adolescent tendencies -- at times unresponsive, rash, selfish, and fluctuating between arrogance and self- doubt. By virtue of some hard work and a lot of luck, it's ended up in a position to potentially be an upstanding member of society. To ignore it or wish it away is foolhardy. It's here and the influence is growing. And whether it's the price of your morning cup of coffee, your bed sheets on a business trip, or the size of your retirement check in the mailbox, you're involved.

1. Paul Hodkinson, "Logjam Gives Buyout Firms $1.2 Trillion Hangover," Financial News, March 19, 2012. http://media.e?nancialnews.com/story/ 2012-03-19/logjam-gives-buyout-?rms-hangover 

2. Katie Gilbert, "New Green Portfolio Program Could Change Private Equity," Institutional Investor, September 6, 2011. www.institutionalinvestor.com/Article/2895315/New-Green-Portfolio-Program-Could-Change-Private-Equity.html

. . .

Continue reading here

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sun, 10/07/2012 - 09:37 | 2864533 lolmao500
lolmao500's picture

Breaking: Turkish media reports Turkey has exchanged fire with Syria after new mortar strike on Turkish border town

Sun, 10/07/2012 - 09:42 | 2864536 GMadScientist
GMadScientist's picture

Reports, "This Time We're Really Really Really Mad!"

Sun, 10/07/2012 - 09:58 | 2864555 Absinthe Minded
Absinthe Minded's picture

Don't shoot the messenger here. Is ABC Limited the ABC from America or something different? I don't see ZH getting watered down at all but it worries me if a big dog from the media circus owns part of ZH now. At the bottom of the ZH page it says, " ZeroHedge.com / ABC Media, LTD.

EDIT: Never mind, no affiliation. Thankfully. Now I feel like an idiot.

Sun, 10/07/2012 - 10:21 | 2864576 TrulyStupid
TrulyStupid's picture

The private equity game is based on having preferential access to the money spigot. On the accounting side a company's EBITBA is all that matters, as a company can be flipped from one PE group to anoother. A well run firm with positive EBITBA can be purchased by private equity in the same way that commercial real estate is priced.. by capitalizing the cash flow and financing the buy out with minimum equity and maximum leverage at a preferred rate. 

The buyer can go on to "consolidate" a whole sub-industry in this way, replacing small business owners with local managers and cutting wages and benefits to boost EBITBA. This is monopolistic capitalism at work... the end goal is to "build a moat"  read create a monopoly or cartel.

I once was associated with a private business that went through several flips in 5 years.. each time the new owners would cut back on product development, sales commisions and benefits as well as scrimp and save wherever in order to boost EBITBA and hence the buy out value to the next PE group. The central bank cooperates by constantly moving the interest rate lower (finacing costs) enhancing EBITBA. This really is a race to the bottom with EBITBA in a bubble that must pop to the detriment of the business and its employees. The hedgies do OK as they skim off all the real equity.

Sun, 10/07/2012 - 10:36 | 2864590 falak pema
falak pema's picture

+100

I concur as posted.

Sun, 10/07/2012 - 10:45 | 2864594 UGrev
UGrev's picture

The world.. how it works.. believe..  Three things said in one sentence that make me boil from the inside out. Not because of the words themselves, but because of how they are spoken; how they are said. How the person speaking those words uses their body, their voice.. every physical aspect of their person to create a context of "Oh well, that's just the way it is".  

I'm sick of it. Sick to my stomach. Sick of it all. This world we've built is not reality. It's the blanket over reality. Twice this weekend alone I've been told that you have to lie, cheat, steal and lie some more to really make a success out of yourself. Is that what I have to do? Is this what it takes to achieve a goal these days?  Has honesty been thrown to the curb?   

This past friday, I told my co-workers in a team meeting that I am not going to participate in any type of cover up explicitly; that I refuse to admit guilt to something and not follow through with the commitment of truth.  I'm a software developer. I fuck up every now and then. If that wasn't ever the case with software, the market for bug tracking software would not exist. Because I am human, I fuck up and FUCKING OWN UP to it EVERY TIME.  Well, apparently owning up to your fuck-ups.. thanking the TEAM for helping in cleaning up the mess and taking steps to ensure that any situation like that doesn't happen or is extremely unlikely to happen again is just not good enough.  Apparently, when prompted by our customers about "why xyz?", I am supposed to lie. I am suppose to compromise my morals and ethics for the continued success of the company for which I work.  

So now I sit here and think about how these types of situations really fuck with a persons' current belief system compared to a reality which goes against every bone in one's body.  Now, I pride myself in being firmly rooted and I know that a "Good business man, I would not make". If lying and defrauding my fellow man is how it is done, if fucking my neighbor when he's not looking is what is necessary to succeed in creating and sustaining a business.. then I want no fucking part of it.  Honesty burns. The truth hurts.  But what happens when you lie and you are caught lying?  Does your business get hurt more than if you told the truth up-front? I guess that depends on the situation.

Call me naive, say what you want. You can say that "This is the way it works and it's the way it will always work" and I might agree with you reluctantly. But is it the way that it should work?  Why is it that we cannot say things like "Hey Bob.. We made a mistake last week and some widgets never made it to your store and we still charged you for it. We're sending the widgets that we missed in the next shipment"? Or "Hey Joe, we realized that our database was got messed up due to a mis-configured release which didn't update the database string to point the live database and registrations went to an "offline" db instead. We took steps to fix it, so if you see any problems, let us know immediately and we'll attend to them". Is that really so hard?  Does telling the truth cost people more than if you lied? If so, doensn't that register with some of you here that we are just BAD humans?  Why does the truth get punished more than defrauding someone? 

It seems to me that we've been programmed for using failure and honesty as a chance to fuck the other guy. We've been programmed to lie, cheat, steal and bully to achieve success instead of building success on honesty and truth. Are we too far down the rabbit hole now that we can't do this? that we can't possibly return to an honest existence? Are we forever plagued with great success being achieved by enslavement of morals and ethics at the cost of good people? And what does that do to those of us who try to be good people? Does it dis-hearten us to the point that we just give in to it? or does it make us stronger in our convictions?  I suppose that depends on the person. 

But I'm letting you all know, right here and now, that under no certain terms is any of the dishonesty that flows through veins of this country, warranted OR acceptable. This is NOT how a people should behave as unit, as a team. This is NOT how to succeed and stay successful.  Building your success on the backs of lies and fraud is building a house of cards. Building your success on being a good and honest person while you seek your goal builds a solid foundation that lies and fraud can't destroy. But in this atmosphere, I don't think it can be done. That to me is the most sad revelation that I've come to terms with this weekend; That we, as a united people, see the path to success outlined with fraud instead of truth. We refuse to see that under the pavement, there is just earth. Yet we continue to deceive ourselves, willingly, so that we can "feel" better about what we are doing. To constantly repeat it so that the lie becomes truth.

Is this, is any of "THIS",  really what we want? Are we so desperate for greatness that we are willing to sacrifice our humanity to achieve it? Is this what we want? And how do I stare into the eyes of my children and tell them that in order to achieve great success in this country, you have to defraud your fellow man. You can be an honest person and achieve ordinary succcess but you will never be tops unless you are bad person. I'm sorry, but that is not a reality that I willing to accept and neither should any of you. Acceptance of this reality is EXACTLY why we are in the shape we are in as a country; and I'm ashamed to be a part of it. 

Enjoy the rest of your weeekend, bitches. 

Sun, 10/07/2012 - 11:05 | 2864610 Oh regional Indian
Oh regional Indian's picture

RIGHTEOUS INDIGNATION !!!

Everybody get some.

well said ugrev...

ori

Sun, 10/07/2012 - 11:15 | 2864624 UGrev
UGrev's picture

Thanks, man.  I think I've finally gone Galt. Further more, I finally understand what it means. 

 

Sun, 10/07/2012 - 16:40 | 2865802 Anti Psychotic
Anti Psychotic's picture

@ UGrev

 

AMEN

Sun, 10/07/2012 - 10:59 | 2864604 news printer
news printer's picture
90 year old Italian choose Police station instead of bank account

90 year old grandpa came to the police station with a plastic bag full of money, and said: "I do not trust the banks, can I keep my savings in here? ".

http://www.direttanews.it/2012/10/06/90enne-va-in-caserma-con-50-mila-eu...

Translated:

http://www.section9department17.com/1/post/2012/10/90-year-old-italian-c...

Sun, 10/07/2012 - 11:03 | 2864609 Earl of Chiswick
Earl of Chiswick's picture

Such wonderful irony as the PE guys skin their prey alive.

 

Much of their funding originates with that very prey who by way of taxes subsidize the the large pension plans (think CALPERS) that in turn fund the PE guys. 

Meanwhile they always seem to find enough leftover fat to build their castles

http://www.google.co.uk/search?hl=en&q=vitrual+globe+trotter+private+equ...

 

 

 

 

Sun, 10/07/2012 - 13:11 | 2865132 tahoebumsmith
tahoebumsmith's picture

Fascism doesn't include the Little Man... The vultures will just keep pecking away at America's carcass until there is nothing left...

http://www.youtube.com/watch?v=qBh-m1yTZS0

Sun, 10/07/2012 - 13:59 | 2865233 edifice
edifice's picture

I'd say that's done and over with... They're sucking the marrow out of the bones, at this point.

Sun, 10/07/2012 - 14:45 | 2865320 Grill Boss
Grill Boss's picture

The bigggest private equity game in town.... Utilities, Information Derivatives, Energy Harvesting... this is where the money is and nobody's looking there

http://bcfreedom.wordpress.com/2012/10/01/smart-meters-energy-harvesting...

Sun, 10/07/2012 - 15:39 | 2865409 thorgodofthunder
thorgodofthunder's picture

REAL ESTATE Updated July 10, 2012, 11:37 p.m. ET
Blackstone to Shed Office Empire
A Likely Sale of Portfolio Comes as Commercial Market Continues to Recover; 'We Will Really Crush It'

http://online.wsj.com/article/SB1000142405270230329220457751881059370111...

I followed this deal closely at the time and decided that would have to represent the ultimate top of the market- when property legend, genius and super sized ego mini me elf Sammy Zell would hand over the keys to his empire to the sharks. Sure nuf it crashed but somehow the sharks kept the music going long nuf to exit now with a huge gain.

The p/e pirates are driven by one thing- mt Everest sized fees. Eventually when the music stops they're never left holding the bag.

Do NOT follow this link or you will be banned from the site!