Private Equity Carl's Jr. Hardees

Private Equity CKE Restaurants

Thomas H. Lee Partners Buys CKE Restaurants Inc.

THL Partners is planning on purchasing CKE Restaurants Inc., paying a 24% premium on Thursday's closing price of $8.91.  CKE Restaurants Inc.'s companies include two major restaurant chains, Carl's Jr. and Hardee's.

THE DEAL: Thomas H. Lee Partners, a private equity firm, said Friday it will buy CKE Restaurants Inc. The regional fast food chain owns Carl's Jr. and Hardee's restaurants.

THE TERMS: Under terms of the deal, CKE shareholders will receive $11.05 in cash for each share they own — a 24 percent premium to its Thursday closing price of $8.91. That puts the deal's value at around $619 million in cash. THL will also assume $309 million in debt.

THE TIMELINE: CKE has until April 6 to seek other offers. Otherwise, the deal is expected to be complete in the second quarter.  Source

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Blackstone Q4 2009 Earnings

Blackstone Q4 Earnings

Blackstone Group Reports Small Loss in Q4 2009

When can a loss be good news?  For Blackstone Group, a slight fourth quarter decline beat analysts expectations and drove up shares by at least 1%.  The fourth quarter is often the least impressive so a small loss is not as bad as it may seem anyway.  The private equity and hedge fund firm has struggled to regain its footing after heavy losses suffered in the financial crisis.

Blackstone's AUM in the fourth quarter was $96.1 billion, a drop from the previous quarter but 6% higher than a year earlier.  An important note is that Blackstone had negative private equity revenues in 2008 and in 2009 private equity funds brought in $775.2 million showing that the big firms can still make returns even in a tough market for buyouts. 

Blackstone is considered well-positioned in much of its private equity portfolio, because it doesn't have as much long-term debt coming due as some of its peers. That's not to say it hasn't had its issues. Last week, The Wall Street Journal reported Blackstone reached a pact to cut by $4 billion its $20 billion worth of debt in its Hilton Worldwide investment. Without the restructuring, it might have been forced to sell some Hilton assets.

Blackstone posted a loss of $143.3 million, compared with a year-earlier loss of $415.2 million. Economic profit, which excludes costs related to its initial public offering and acquisitions, rose to $329.4 million, or 29 cents a unit, from a year-earlier loss of $763.8 million, or 68 cents a unit.

Revenue was $725.3 million. The prior-year figure was negative due to large investment losses.

Analysts polled by Thomson Reuters predicted earnings of 20 cents on $567 million in revenue.

Earlier Thursday, Blackstone peer Fortress Investment Group LLC (FIG) posted a narrower fourth-quarter loss as its incentive income rebounded.  Source

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Delivering Happiness Tony Hsieh CEO of Zappos.com

Delivering Happiness - Tony Hsieh CEO, Zappos.com

Here is a short slide show presentation by Tony Hsieh, CEO of Zappos.com on running a company which is aligned with it's priorities and customer needs.  I think that all businesses from private equity firms, to consulting firms, and training groups could benefit from some of these ideas.  

If you are reading this via RSS or Email click here to view the presentation on our website.

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Private Equity Financial Reform Video

Buyouts Financial Reform Video

Video Explaining the Push to Regulate Private Equity Firms

Here is an interesting clip I came across this morning on private equity and how the industry would be effected by the President's proposal to regulate hedge funds and private equity.  Jones Day partner Bob Kennedy does a great job of explaining the possible motives behind this administration and congress's plans to regulate private equity.

Primarily, it is because private equity is an easy target.  Although there have been reports finding that private equity firms may actually create jobs (see this report) the popular conception is that buyout funds will take over a company strip it down and coldly fire many employees.  This makes buyout shops an ideal mark for financial reform as this short video explains (for those of you following via e-mail or RSS, watch it here):








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Bloomberg Quadrangle Group

NYC Mayor Bloomberg Pulling $5 Billion from Quadrangle

New York City's Mayor Bloomberg is expected to pull an estimated $5 billion from Quadrangle Group, a NY-based buyout firm.  This is another high-profile blow to the private equity group, which is under investigation by the state attorney general.

Quadrangle is another target of New York state AG Anthony Cuomo's investigation into pay-to-play schemes between private equity firms and pension funds.  Those Quadrangle employees working on Bloomberg's account are leaving and may continue managing Mayor Bloomberg's account through a family office.

The development is another blow to Quadrangle, a New York-based private-equity and investment firm, which is under investigation by the New York state attorney general into how it secured an investment from New York state’s pension fund, and whose co-founder Steven Rattner left early in 2009 to lead the Obama administatrtion’s efforts to rebuild the U.S. car industry.

Quadrangle told its clients late last week that Bloomberg’s account would be leaving along with the Quadrangle team, lead by Alice Ruth, that managed it.

Lattman’s sources reckon Ruth and at least some of her ex-Quadrangle team of about a dozen will continue to manage the Bloomberg account, perhaps as a private family office.
Bloomberg, a friend of Rattner who grew wealthy building the Bloomberg LP media company before going into politics, awarded Quadrangle the money-management mandate, which increased its assets under management nearly twofold, in 2008.  Source

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Constant Capital Raising

 Why Constant Capital Raising is Critical to Success

 One mistake made by private equity firms and other capital-raising firms is that they will set a specific month reaching a capital raising goal.

For example, management will decide, "We have to raise $1.2 million by May."  It is great to have a capital raising goal, but setting a specific date is the wrong mentality.  Fund marketing is about having a system in your private equity firm for raising capital all the time.

Sure, you may have a target you'd like to reach but that implies that once you reach that target you can slack off and focus on other areas such as finding investments for that capital and executing deals.  This is a natural progression, when an investor agrees to give your fund X amount of his money the manager is expected to put that money to use (i.e. to invest the money).  So the fund will immediately focus efforts away from raising capital and toward setting up deals and managing current portfolio companies or investments.

Fundraising should always be an integral part of your fund's day-to-day operations and not just a concern when you want to launch a new fund or for fundraising rounds.  No matter what is happening in your firm's other projects and responsibilities, you should always be searching for new clients, keeping up with new capital raising strategies and practices, improving investor relations, educating potential clients and designing high-quality marketing materials.  By taking your eye off the ball, your firm will fall behind those competitors that understand the value in constantly improving your capital raising efforts. 

Additionally, by abandoning your capital raising efforts as soon as you reach a specific goal you will lose out on those other clients that you were communicating with.  For example, you are reaching out to a potential investor (a big client which would invest in other funds and is expected to grow along with your firm) but before he agrees to commit any capital, your firm reaches its capital target.  A firm consistently committed to fundraising despite timeline or goals will still reach out to this investor and make sure it has another investment opportunity for that investor.  Even if the firm does not require any more capital, the firm's marketing team will continue to build ties with this client to ensure that the client will be on board for future capital raising campaigns.  A firm which abandons its focus on capital raising after reaching a target will likely lose contact with this client and may not be able to regain that investor's interest or loyalty.

I hope that this has given you some reasons why continually maintaining your capital-raising efforts is essential to succeeding in fund marketing.


Disclaimer: consult a legal professional before following any of the preceding suggestions.



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Islamic Finance Industry

Private Equity to Fund Islamic Finance Industry

An interesting talk recently took place centering on Islamic finance and how private equity firms can better understand Sharia concepts in order to succeed in this area.  Buyout firms are likely to be a critical factor in developing the Islamic finance industry, according to Harris Irfan, head of Islamic Products at Barclays Capital, pictured left, talking at the Reuters Islamic Banking and Finance Summit.

Like most parts of the world, the private equity market in the Middle East came to a standstill in 2009 as liquidity conditions and deal opportunities dried up.
"Private equity is going to be a big boom area," said Harris Irfan, head of Islamic Products at Barclays Capital, speaking at the Reuters Islamic Banking and Finance Summit.
"The capabilities of producing sharia- compliant private equity funds are actually very limited in the market despite the fact that people talk about private equity and Islamic finance as a natural fit."

Irfan said he hopes to see private equity fund managers get comfortable with sharia concepts to create a space for such funds to operate in.
"The reality is executing a sharia-compliant private equity fund is very different from visualizing it."
State-owned Abu Dhabi Invest AD said in October it was planning an Islamic private equity fund.  Source

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South Africa Private Equity Regulation

South Africa Government Moves to Regulate Private Equity

South Africa is taking the lead in international trends and moving to regulate private equity.  South Africa announced this week that it will regulate domestic private equity firms.  The decision is part of a broader shift toward clamping down on the financial industry.

“Although our institutions have proved to be robust, we must not be complacent. I want to highlight several new initiatives to improve our regulatory system,” said Finance Minister Pravin Gordhan.

“We are reviewing our adherence to global regulatory standards in banking, insurance and securities markets. We will be expanding the scope of regulation to include hedge funds, private equity and credit ratings agencies,” he added.

Gordhan also indicated that a dedicated council would be established, unifying regulators and enhancing their co-ordination, performance and accountability.

He said, “The framework for accountability, co-ordination and performance of our financial regulators needs to be strengthened. A formal council of regulators may be instituted to serve this purpose.”  Source

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Property Private Equity Fundraising

Property Private Equity Funds Struggle to Raise Capital

I've spoken with several professionals in real estate looking for private equity funding for big property development projects but the funding is rarely available in the last two years.  One factor for this problem, aside from the turmoil in the housing and real estate market, is that property-focused private equity funds are having a terrible time fundraising.  The number of real estate private equity fund launches fell by more than 25% last year, after a significant drop in values led managers to reconsider fundraising campaigns and executing new deals. 

Property private equity advisor Swisslake Capital AG said 285 new funds raised a total $110 billion in 2009, some 53 percent less than the $234 billion raised in 2008.

Swisslake said the decline was partly due to a drop in support from risk-averse pension funds, which also found their investment plans frustrated by the "denominator" effect, which occurs when falling asset values force portfolio adjustments.

"Fund managers reported negative performance figures quarter after quarter, making it difficult for investors to regain confidence and feel comfortable that the market was finally bottoming out," the report said.

"Many investors have also become much more demanding in terms of the due diligence process, delaying the initial commitments which can be a decisive factor for other investors to step into a fund," Swisslake said.  Source
 

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Asset Managers IPO Market

Asset Managers Warn Against Private Equity-Backed IPOs

It's too bad we have to start off the week with some disconcerting private equity news.  Private equity-backed companies are expected to dominate the IPO market in 2010 but asset managers are warning that buyout firms have failed to adapt to the post-crisis financial environment.  Unless buyout firms reduce leverage and lower prices their portfolio companies may struggle to find interest in the public market, according to several asset managers.

Asset managers have lost trust in buyout firms and warn that, if private equity managers want to offload any more of their portfolio companies onto the stock market, they must lower prices, reduce leverage and allow more time for due diligence.

Buyout firms last week pulled the initial public offerings they had been planning for travel group Travelport, U.K. leisure group Merlin Entertainments and U.K. retailer New Look. General uncertainty about the equity market's direction was part of the reason, but fund managers expressed deeper concerns that the buyout industry had failed to adapt its model sufficiently to reflect the post-crisis world.

Robert Talbut, chief investment officer of Royal London Asset Management, a U.K. fund manager with GBP32 billion of assets, said: "The public equity market is biting back. Having inherited leveraged structures when they bought private equity-backed IPOs in the years up to 2006, fund managers are reluctant to help support buyout firms' internal rate of return numbers." Source

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Private Equity Charitable Contributions

Private Equity in 2009's Top 60 Charitable Contributions

For all the bad press private equity receives (still not as much as hedge funds) it's nice to note the positive coverage.  Several names from private equity made it into Slate's list of the Largest American Charitable Contributions of 2009.

Mark Yusko, CEO of Morgan Creek Capital Management, ranked #28 by giving $36 million to Notre Dame.  A retired buyout professional, B. Charles Ames, follows at #36 by donating $25 million to Illinois Wesleyan University.  David Rubenstein of Carlyle Group also made it on the list at #52 by donating almost $16 million to the renowned Lincoln Center for Performing Arts in Manhattan.

It's really inspiring to see these buyout executives give back so generously.  To read the full list of donors (including other noted financial pro's like George Soros) visit Slate here.



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SuperReturn 2010 Prediction

SuperReturn Speakers Predict Fundraising Competition

Two big names in private equity, Guy Hands of Terra Firma and David Rubenstein of Carlyle Group, warned that fundraising competition between private equity firms will only get more intense.  The two spoke at the SuperReturn 2010 private equity conference in Berlin.  Buyout firms have struggled raise new capital following the financial crisis and every manager will be fighting for the few investors ready to return to private equity.

But if buyout shops lower fundraising targets and agree to more favorable terms to investors, Rubenstein suggested, a private equity recovery may come sooner.  Investors are certainly going to be more active in examining private equity firms so managers should be familiar with every facet of the business and able to answer any questions nervous investors may have.

In separate presentations at the Super Return 2010 conference here, Guy Hands of Terra Firma Capital Partners and David M. Rubenstein of the Carlyle Group said that competition among general partners for fresh capital will grow fiercer than ever.

To be sure, private equity has plenty of fire power on the sidelines. According to the data firm Preqin, the industry has about $1 trillion of uninvested commitments.
But private equity firms are constantly looking to raise more money, and that is something that neither Mr. Hands nor Mr. Rubenstein sees becoming easier soon.

Mr. Hands argued that limited partners are feeling skeptical about private equity and are examining other asset classes and the amount of money they have invested in his industry. He predicted that limited partners will reshuffle their capital allocations by 20  to 30 percent.  Source

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Private Equity Natural Gas

Private Equity-Owned Natural Gas Plant Explosion

An unfortunate incident happened at a Connecticut natural gas power plant owned by a private equity firm.  Five construction workers perished in an explosion at the Kleen Energy Plant on Sunday.  Energy Investors Funds has owned an 80% stake in the plant since 2008 and was in the process of a large deal to sell energy to Connecticut residents, who pay one the highest rates in the U.S.

The Middletown, Conn., facility, which was near completion, is contracted to sell its capacity to Connecticut Light & Power for 15 years once it is operational. The deal is supposed to help lower electricity rates in Connecticut, where residents pay among the highest rates in the U.S.

Connecticut Attorney General Richard Blumenthal opposed the project, though, saying state residents had no assurances that the plant would provide power at lower rates.
The complex Energy Investors Funds deal involved about $361 million of equity and about $1 billion in loans underwritten by Goldman Sachs Group Inc. Completed in the treacherous financing environment of 2008, the project was named North America's Single Asset Power Deal of the Year by Project Finance magazine.

In a statement, Energy Investors Funds expressed "enormous sympathy and concern for the workers at the Kleen Energy plant and their families," and said it would provide more information as it became available.  Source

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Volcker Rule Private Equity

Volcker Rule

The Paul Volcker Rule and Private Equity

The so-called Volcker Rule is a financial reform proposal by President Obama's economic advisor, Paul Volcker.  The Volcker Rule proposes reducing the size of banks and placing limits on banks' proprietary lending.  As the President outlined the plan earlier this month, “Banks will no longer be allowed to own, invest or sponsor hedge funds, private equity funds or proprietary trading operations for their own profit, unrelated to serving their customers.”

Although this would in some ways hurt the industry, private equity firms would also gain from the rule because it would reduce and even eliminate competition from large investment banks.  For more information on the Volcker Rule see the Journal's coverage here.  It does seem that Congress will reject the Volcker's push for financial reform but it is possible that a similar bill with his ideas will surface this year. 

I came across this FT interview with Tony James, president of Blackstone, where he discusses the Volcker Rule and how it would impact private equity:

FT: What do you think about the Volcker rule, is it a good idea?
TJ: I think it’s too vague to know, frankly. I don’t think it’s going to in any way make the system more systemically safe. At least as far as managing the private equity hedge funds go, I don’t think that they are sources of systemic risk. Prop trading, hard to know how that’s defined, I don’t know how you define the role between what’s hedging and what’s really speculative bets. I think tampering back speculative bets is probably a good thing, that part of it I agree with.
FT: And by all players or just by banks?
TJ: I think it’s fair to say by people that get the support of the Federal Government, whether that be access to the Fed, deposits that are guaranteed or other debt guarantees.
FT: So, that sounds like you agree with the spirit of the Volcker rule?
TJ: I think it’s hard to implement, though. I think it’s one of those admirable goals and I think that will be in the details.
FT: As regulations currently stand, are regulators requiring banks to put enough capital against proprietary trading?
TJ: I think you’d have to say no in retrospect. I think you’d also have to say they’re not paying enough for the deposit insurance in retrospect.
FT: And in retrospect, do you think Volcker is right to be focusing on this as a particular source of systemic risk? Some people have said no, that it’s beside the point.
TJ: I think it could play a role in it, I don’t think it’s critical. Again, I don’t think you have to get them out of the business, which is what Volcker’s trying to do. I think you can do it with capital requirements and sources of funding and things like that.  Read More

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Spain EU Regulations

Spain Pushes EU to Regulate Non-EU Funds Tougher

Spain is working to enact tougher regulations on non-European Union hedge funds causing further problems in negotiating the EU's Alternative Investment Fund Managers legislation. Spain has taken the reins from Sweden as head of the EU and is pushing for a Swedish proposal to force foreign funds marketing their services inside EU countries to make their yearly report available to investors and regulators and be subject to tighter inspection by a regulator.

The foreign-funds clause has been one of the more contentious aspects of the EU's controversial Alternative Investment Fund Managers legistlation and has prompted accusations of protectionism by hedge-fund industry officials and the U.S. and U.K. governments.


The proposed change underscores the bloc's deep ideological divisions about regulating financial markets in the wake of the economic crisis. Germany, France and Italy are staunch critics of hedge funds and other aspects of financial markets that critics say have evolved beyond regulators' understanding and oversight.


The U.K. has taken the opposite stance, saying added scrutiny could push financial firms to find new venues with less stringent regulations. The foreign-funds clause in its current form would create "significant legal uncertainty," the Bank of England's Financial Markets Law Committee said in a report published Tuesday, which in turn could lead to "widespread market disruption." Source

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Europe Private Equity IPO Update

European Privately-Held Companies Preparing for IPO

European companies held by private equity firms are preparing for an initial public offering this year.  Private equity firms are eager to take these portfolio firms public to finally gain the profits from selling the shares.  It has been a quiet two years for private equity firms but it is expected that buyout firms will dominate the IPO market this year, with 20-30 private equity-owned companies considering an IPO in 2010.  Read more about the expected wave of private equity-held companies launching IPOs in 2010 here.

Bankers say 20 to 30 private equity-owned companies in Europe are contemplating IPOs this year. Some buy-out executives say this expected wave of flotations could be a crucial factor in their industry’s recovery from the crisis.

Stephen Schwarzman, Blackstone’s chief executive, has told investors that his group plans to float eight companies this year. In the UK, Permira has promised to return a “wall of cash” to investors by floating or selling a number of its portfolio companies.

Private equity is expected to dominate the IPO market this year, after two quiet years. Private equity-backed IPOs raised $16.4bn globally last year, up from $11bn in 2008, but a fraction of the $55.8bn in 2007, according to Dealogic, the financial data provider.

Most of the flotation action by private equity last year was in the US, where 25 companies raised $8.5bn, and in Asia, where 25 companies raised $7.1bn. Europe, the Middle East and Africa produced only three private equity IPOs raising just $779m.  Source

What is an initial public offering?



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Private Equity Consolidation

Managers Predict Private Equity Industry Consolidation

A new survey found that the majority of buyout managers are expecting a consolidation within the industry as fundraising troubles persist, the economy is still struggling, and looming regulation.  Expectations for mid-market buyouts are much more optimistic on the other hand, as three quarters of surveyed managers said they would do more mid-market deals as financing is more available for smaller deals. One of the biggest concerns for managers is the cost of debt financing for deals which has forced a decline in buyouts and managers fear that banks will not loosen credit for some time. 

More than four fifths of managers working in private equity expect a wave of closures or mergers within the industry because the poor fundraising environment will last longer than previously expected, according to a survey of senior buyout practitioners.

The poll, conducted by Private Equity News, found that difficulty in raising funds, coupled with fears about the health of the economy and increased regulation, would continue to haunt the sector, with larger buyouts in particular likely to face a challenging year.

Only one quarter or those who took part in the survey said they expected the average cost of debt financing to be lower this year, compared with 2009.

Of the 500 people and firms surveyed, three quarters of those who expected consolidation said it would come from firms closing because they would be unable to raise funds, while a quarter expected consolidation through mergers or acquisitions.  Source

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Obama 2011 Budget Hedge Funds

Obama's 2011 Budget Raises Taxes on Private Equity

President Obama released his budget proposal for 2011 which would raise taxes on private equity firms and hedge funds.  As expected, the president is urging Congress to eliminate the carried interest tax loophole and tax performance fee income as ordinary income.  This change would be a significant blow to funds and managers who rely on this performance fee.  Congress still has to approve the budget and it will likely be changed from Obama's original proposal.

The president’s plan would eliminate the so-called carried-interest loophole, which taxes fee income earned by alternative investments professionals as capital gains, rather than ordinary income. The Obama plan would tax performance fee income as ordinary income, nearly tripling the amount some managers will pay. The provision would add $24 billion to the government’s coffers over the next 10 years.

The fiscal year 2011 budget also includes several other tax provisions likely to hit the alternative investments industry hard. Obama has proposed allowing the tax cuts on wealthy Americans pushed through by President George W. Bush to expire, increasing the top income-tax bracket to 39.6%. That would net nearly $1 trillion in new revenues for the government as it struggles to both prop up the U.S.’s ailing economy and cut its ballooning deficit.

Tags: Private equity, taxes, tax treatment, capital gains loophole, carried interest, income taxes, fund managers taxes, obama budget

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