The invisible money power behind private equity firms are the same international bankers that engineered this worldwide banking crisis, with the goal of consolidating the world's wealth into their hands.
Several private equity firms have approached Internet and media companies including News Corp and AOL Inc to gauge their interest in buying out Yahoo Inc, a source with knowledge of the approaches said.
The news comes as Yahoo, the No.2 search engine in the United States behind Google Inc, struggles to revive its revenue growth under the management of Chief Executive Carol Bartz, and to rebuild its buzz among consumers amid competition from social networking sites such as Facebook.
A potential deal would be contingent on Yahoo selling its prized Asian assets, including a 40 percent stake in China's Alibaba Group and 34.5 percent of Yahoo Japan, the source told Reuters on Wednesday on condition of anonymity because discussions were not public.
Talks with News Corp and AOL began about two weeks ago and intensified in recent days, but Yahoo had not yet been approached as talks were still in their early stages, the source said.
Yahoo shares, which finished Wednesday up nearly 6 percent, gained another 9.5 percent to $16.71 in extended trading. Shares in Alibaba.com and Yahoo Japan rose in Asia trading.
Speculation of private equity interest in Yahoo, which is also struggling to stem an exodus of senior executives to rivals, has surfaced sporadically in past months.
Silver Lake Partners was among the firms in very preliminary, recent discussions about acquisition scenarios, a second source with knowledge of the matter said.
Blackstone had also been pitched the idea but was not currently working on a Yahoo deal, a separate source said.
News Corp, AOL, and Yahoo declined comment.
GOOGLE DOMINATES
Yahoo's plans for its Asian investments have sprung into the investor spotlight since Yahoo Japan turned to arch-foe Google for its Internet search technology.
Once dominant in search, Yahoo has been overshadowed by Google's growth and its market value is now little more than a tenth of its rival.
In Tokyo, Yahoo Japan gained 5.5 percent and Yahoo Japan's top shareholder, Softbank Corp, rose 2.9 percent.
Yahoo Japan has a market capitalization of about $20.5 billion, valuing Yahoo's stake at about $7 billion.
Shares in Alibaba.com edged up 0.3 percent in Hong Kong.
Analysts value parent Alibaba Group, China's largest e-commerce company, at between $15 billion to $25 billion, meaning Yahoo's 40 percent stake is worth up to $10 billion.
By disposing of those assets -- which some of Yahoo's investors favor -- would help drastically reduce Yahoo's market value of almost $20 billion now, making a deal more feasible.
Analysts said disposing of Yahoo's Asian assets, particularly its high-growth Chinese assets might be a problem.
"An Alibaba share sale is not easy to achieve. It is not a small deal and obviously it would be hard to calculate the valuation to the benefit of all parties," said Wallace Cheung, an analyst with Credit Suisse in Hong Kong.
Of the three crown jewels of Alibaba Group, only Alibaba.com is listed. The other two, Taobao, China's largest e-commerce site with a consumer focus; and Alipay, China's largest e-payment provider, are private with shifting business models.
Taobao has 75 percent of China's consumer e-commerce market by transaction value while Alipay has 51 percent of China's e-payment market, according to Analysys International.
Softbank, Japan's No. 3 mobile phone operator, also owns 33 percent of Alibaba Group. The heads of the two groups, Jack Ma of Alibaba and Masayoshi Son of Softbank, work very closely, and as one of their latest collaborations, Yahoo Japan and Alibaba's e-commerce website Taobao in June launched online platforms to cross sell into each others' markets.
WANTED: MORE BUZZ
AOL is keen on gaining scale and snagging content to re-kindle growth. The Wall Street Journal cited people familiar with the matter as saying private equity firms were exploring the possibility of teaming up with AOL on a joint bid, which could give AOL the content and online eyeballs it needs to become a news and entertainment powerhouse.
Among various scenarios discussed, one involved Alibaba Group buying back Yahoo's 40 percent stake in the Chinese firm and Yahoo selling off assets to rival media and technology companies, the newspaper reported.
Another could involve AOL combining its operations with Yahoo in a reverse merger -- again after Yahoo sells its stake in Alibaba, it said.
In China, two sources at Alibaba said they had not heard about any buyout of Yahoo's stake. Analysts said that if the talks are preliminary, Alibaba may not have been approached yet.
Bloomberg reported that Yahoo is working with Goldman Sachs to help defend possible takeover approaches, citing three sources.
Whatever form it takes, any deal would likely be a far cry from the $47.5 billion, or $33 a share, offer that Microsoft made for Yahoo in 2008 and which was rebuffed by Yahoo's co-founder and then-CEO Jerry Yang, analysts and investors said.
Ironfire Capital's Eric Jackson, who was involved in an activist campaign directed at Yahoo during the time of the Microsoft acquisition talks, said that even a $20 a share offer for Yahoo -- which would represent a nearly 40 percent premium over Tuesday's closing price -- might encounter resistance from some of Yahoo's major shareholders.
"There would be some large shareholders in Yahoo that wouldn't like that, they wouldn't view that as an attractive exit for them," said Jackson, who no longer owns Yahoo shares.
One of the scams that the rich use the government for in order to stop less wealthy people from getting richer is to promote the lie that, since venture capital is “riskier” than investing in public securities on the NYSE (another lie), individuals with less than a certain minimum net worth should not be allowed to invest in these “riskier” VC investments.
Bankster puppet Sen. Chris Dodd (D-CT) has inserted into the upcoming financial “reform” bill a clause that would more than double the minimum net worth of a potential venture capital investor from $1 million to $2.5 million, or require an annual salary of $450,000 for the past two years to the current annual salary requirement of $200,000 [the article mistakenly says it is $250,000] for the past two years. (Here is a link to the current minimum net worth regulations.)
Putting aside the libertarian principle that my money is my property -- and, therefore, just like the property of my body, it is up to me to decide what I want to do with it as far as my personal subjective risk is concerned -- an important issue here is that this new rule forcibly prevents people from investing in an area that not only can bring them much higher returns than publicly-traded stocks, but it cuts down the supply of investment funds for smaller, innovative new firms.
These smaller, innovative new firms generally find it much more difficult to raise funds compared to an established big corporation, because the start-up firms’ products have not yet proven themselves in the marketplace.
The bill insert also requires that a start-up firm wait up to four months to get permission from the Bankster-controlled SEC to accept the investment funds. And, get this:
“…this proposed bill also seeks to change the rules for a federal pre-emption [sic] for state regulation. Under the proposed bill, start-ups would be subject to state regulations from the 50 different states. Right now, start-ups & investors are not subject to 50 different state regulators. This would likely lead to more cost & risk for the start-up.”
Yes, this is just what our depressed economy needs now -- even less businesses to employ people and provide new products to improve our lives.
The invisible money power behind these secretive private equity firms are the same international bankers that engineered the worldwide banking crisis, with the goal of consolidating the world's wealth into their hands.
By Barbara Kiviat, TIME
November 24, 2009
Over the past decade, some 3,000 U.S. companies have been bought by private-equity firms. Their M.O.? Suck up companies with borrowed money, make them more efficient and then resell, turning a profit in the process.
These days, nearly 1 in 10 nongovernmental employees works for a private equity–owned company, and that, says longtime industry reporter Josh Kosman, is a big problem. In his new book, The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis, Kosman argues that private-equity firms not only pillage the companies they buy, but also put the broader economy at risk by making those companies take on copious amounts of debt.
TIME's Barbara Kiviat spoke with Kosman about where he thinks the industry is headed.
You predict that private equity will go through a shakeout similar to what we've seen in the housing market. How does that analogy work?
Private-equity firms used the same cheap credit to buy companies that caused the housing bubble.
There are about 100 of these firms — KKR, Blackstone and Carlyle are some of the bigger ones — and they buy a company the same way we would buy a house. Put down about 20% and borrow about 80%. The big difference is, the company they're buying borrows the 80%, so they're the ones responsible for repayment. These loans were structured the same way and sold to the same people as mortgages. And the same kind of crazy prices were paid, so unfortunately we probably are going to see a private-equity meltdown just like what we saw in the housing market.
How bad do you think it will get?
The opinions on this shift, but the Boston Consulting Group in late 2008 predicted that about 50% of the companies bought in leveraged buyouts would default on their debt. If half default, and they fire about half of their workers — not the most aggressive estimate — then you're talking about 1.9 million unemployed.
Why haven't we seen more evidence of this yet?
I think the media hasn't put it together, but it actually is starting. The default rate for the past 12 months is roughly 12% — that's very high. Half of those companies that have defaulted, according to Standard & Poor's, had some type of private-equity involvement in their corporate life. A lot of those are PE-owned companies, ranging from Chrysler to the Tribune Company to Simmons Bedding. We've already seen the tip of the iceberg.
More broadly, what sorts of companies should we be worried about?
Unfortunately, private-equity firms infiltrated almost every industry — industrials, consumer goods, retail, hospitals, utilities — so a leveraged-buyout bust will be very widespread. TXU, which is now called Energy Future Holdings, one of the largest utilities in Texas, faces huge problems. They probably won't default on their debt until 2013, but at this point, and this is according to ratings agencies, it looks like they have very little chance of paying their debt. The range is from a huge utility like that to HCA, the largest hospital chain in the country.
And you think the private-equity industry will be the next one to line up for bailout money?
Yes. It's already happened with GMAC. You know, private-equity firms are very well connected.Four of the last eight Treasury secretaries currently work for private-equity firms.
Is there anything we could do now to prevent this wave from coming?
Probably not much. One of the main points of the book is to show how private equity and leveraged buyouts don't work, and even if the credit crisis I'm predicting doesn't happen — even if the economy recovers and some of the companies can refinance and push their debt off — the core practice is still destructive.
Many of these companies will fall apart anyway. In the 1980s, when Michael Milken was funding buyouts, 52% of the biggest 25 companies acquired ended up going bankrupt. I did a study of the 1990s, ideal economic times, and with 6 of the 10 biggest buyouts, the companies clearly were worse off 10 years later. In three cases the results were mixed, and in one case the private-equity firm improved the business.
This decade, 6 of the 10 biggest buyouts are already considered distressed, according to Moody's. The core practice does not work and rips apart our economy.
By Bob Chapman, The International Forecaster
September 3, 2009
The Illuminists are desperate.They are appealing theBloomberg directiveto reveal who received funding from the Federal Reserve to keep from going bankrupt.
In addition, HR 1207 (Federal Reserve Transparency Act) will pass in the House this month. The question is in what form. No matter what happens, the Illuminati know we are hot on their trail. They have to do everything possible to end the depression, or go for broke.
Thus far there has been little recovery even with an official $23.7 trillion committed by the Treasury and the Fed. This number alone shows you how serious this situation is.
The banking sector is still broke and is using TARP funds to buy out failing smaller banks. The residential TARP funds returned will go toward helping bail out the collapsing commercial real estate industry. Quantitative easing has not worked, nor has TARP and the endless stream of money from TALF.
We are anxious to see if the FASB sticks to its guns and demands mark-to-market accounting. That will pull the cover off of the fraud known as mark-to-model, which really is mark to whatever you want it to be.
As you can now see this is a much deeper problem than a subprime problem - that just triggered events. As we pointed out before, we are still facing a new wave of subprime loans written over the past year by FHA, Ginnie Mae, Fannie Mae and Freddie Mac, plus ALT-A, Option ARMS Pick-and-Pay Loans, and the failure of prime loans that will stretch to 2013.
On top of that, we have commercial real estate loans now to deal with and credit card failure. This is what the Illuminati crime syndicate has brought you in their lust for more power and riches. We must not forget as well, standing in the wings, are America’s creditors, especially the Chinese who are dumping $25 billion to $100 billion in dollar denominated assets monthly. Their goal is to be out of dollar paper in another 1 1/2 years.
Then there are the other sellers. There are few buyers, so the Fed will have to monetize trillions of dollars in dollar denominated bonds, which presently they are doing secretly.It is no wonder they are terrified of an audit, which would not only uncover their illegal activities, but also expose their leadership and participation in the outrageoussuppression of gold and silver prices.
The status of foreign creditors could turn on a dime. We predict they will abandon ship one at a time, as the dollar slips lower and lower. The Fed and the Treasury have tried over and over to keep the USDX, dollar index, over 80 for weeks, and they have been totally unsuccessful. It settled this past Friday at 78.31, just ready to break to new lows. We wonder how long these countries will tolerate such arrogance and the dream of world government? One must remember these countries are suffering the fallout of the actions that have been deliberately executed by these Illuminists, and they are not happy about that.They are all suffering recession and many depression.It is only a matter of time before they too dump dollar denominated assets.
We would like to say for individuals caught up in this mess worldwide, other currencies are not the answer. Only gold and silver related assets are the answer. Remember that, for in the final analysis, all currencies will fall in value versus gold and silver, and there are no exceptions. We have been there before and seen that, so do not be deluded into going into other currencies, or shares in foreign markets denominated in other currencies; they are not the answer, only gold and silver are.
Then we hear the fairy tales of recovery in the US, Europe and Asia. If you spend enough money you can create a recovery, albeit of short duration. No one is out of the woods. Europe, particularly the eurozone, has cut issuance of money and credit to 3.7%, but they are maintaining interest rates at 1%, which is in reality ½%. The European recovery will be a parallel movement for a year, and without more cheap money or an increase in money and credit, it will die and wither away.
Then there are the ongoing real estate collapses in the US, Ireland, Spain and in the Persian Gulf. There could be a bank panic or holiday in any of these regions.If a panic occurs, the first liquid asset sold will be US Treasuries and Agencies and the US dollar. This would spread terror in Frankfurt, Paris, London and NYC. All these stock exchanges could collapse as well.
The world is about to find out that free trade and globalization has been a disaster.
The millions of jobs lost in the US and Europe, so that transnational conglomerates could prosper, is in the final stages of death.The redistribution of wealth from the rich to the poor countries is about to end in a shattering smash-up. The myth of worldwide prosperity is about to end.
Contrary to prevailing thought, the biggest losers will be world exporters, such as China, which has already seen a 40% fall in exports. All the money and credit creation we have seen in China over the past seven months, some $1.9 trillion, isn’t going to work. They still face 30 million unemployed. Those jobs are not going to return for a long time, if ever. Out of desperation, there eventually will be tariffs (legislated in the US, Europe and in other countries), and inflation will rise as a result.
In America, the safety net of the FDIC doesn’t exist.It is virtually broke, and that is why, a few months ago, unofficially the FDIC asked government for $500 billion.Putting this into perspective, about $700 billion would insure about 1% of all the qualifying deposits in the US.
Not only will the Federal Reserve Transparency Act, HR-1207, pass the House, but also it will pass the Senate, because you are going to write every Senator demanding that they pass it.
If passed, we will see our gold inventories. We’ll find out what toxic garbage the Fed has been buying from banks and what they have paid for it. We will find out every company that received funds and how they were spent. We will subpoena every piece of correspondence, fax, e-mail, and phone calls the Fed has ever made. We will get a real balance sheet; not some version the GAO approved. Wait until the public sees how the Fed and its owners have looted the people for almost 100 years.
Two Republican lawmakers, Darrell Issa, (R-CA) and Rep. Spencer Bachus, (R-OK), House Financial Services ranking members, are seeking an audit of the trust that manages the government’s controlling stake in AIG.
Three more U.S. banks failed on Friday, bringing the total to 84 so far this year, as the industry continues to grapple with deteriorating loans on their books. Regulators shuttered Affinity Bank of Ventura, California, Bradford Bank in Baltimore, and Mainstreet Bank of Forest Lake, Minnesota, which in total are expected to cost the government’s deposit insurance fund about $446 million.
The Federal Deposit Insurance Corp. on Thursday reported that the insurance fund’s balance stood at $10.4 billion at the end of the second quarter. But the agency also noted that the figure was adjusted to account for $32 billion set aside for expected failures over the next year. FDIC Chairman Sheila Bair said this week that bank failures will remain elevated as banks go through the painful process of recognizing loan losses and cleaning up balance sheets. The total of 84 failures this year marks a sharp rise over the 25 last year, and the three failures in all of 2007.
We stated long ago the somewhere between 3,400 and 4,200 banks would go under, and the FDIC would spend trillions of dollars to cover the loses.A loss of 3,400 banks would lead to losses of over $33 trillion.
The FDIC now has foreign banks andprivate equity groupsabout to engorge themselves on failing US banks. Worse yet, rather than cash, the FDIC is allowing these financial firms to use equity, which is unprecedented.The use of non-cash collateral assets is being used because the purchasing banks are broke; and without TARP, not only could they not buy anything, but they’d probably be out of business. What Ms. Bair has done has been to expedite the takeover of banks by bigger banks and involved the use of foreign banks as well as private equity partnerships.
As far as we are concerned, as a foreigner, you have to be deranged to buy dollar denominated assets with the massive monetization of agency securities, collateralized debt obligations, and treasuries going on, never mind the underhanded secret deals the Fed is involved in to fund their markets. If we can understand what the Fed is up too, so can these foreigners. That is what a more than $600 billion swap facility is all about, including suppression of foreign currencies in order to bolster the strength of the dollar.
This month, September, a great confusion will begin.The occupation of Iraq will continue, more troops will be sent to Afghanistan, and Pakistan will become another major battleground.Terrorism will be used to continue to propagandize the American public, along with Cap & Trade and medical reform and the Swine Flu fiasco.These are all distractions to keep the publics’ eye off the continued failure of our financial system.
Deflation continues to eat away at assets, except for gold and silver, and the Fed creates money and credit to offset deflation’s savages.
The torrent of money and credit has pulled some nations, at least temporarily, out of the negative decline on GDP. Japan, France and Germany are examples. The question is when will their economies run out of stream? Probably when they attempt to raise interest rates. In the case of the eurozone, the expansion of money and credit has already fallen 3.7%.
We wonder what will happen when the public finds out that all these problems were preplanned by the Illuminati. Then comes the control of all labor. Government is now spending 185% of tax receipts. The budget deficit will be between $1.6 and $2.00 trillion for fiscal 2009, ending on 9/30/09.
For those who hadn’t noticed, yoy commercial real estate values fell 27% and are off 36% from their October 2007 peak. We'll see a total drop of 70% to 75% from the highs, when all is said and done. Refinancing has to be found for $165 billion in properties by the end of the year, which is impossible, even with leftover TARP funds.
Deflation has prices somewhere between minus 2% to plus 5% worldwide as imports and exports have fallen over 30%. As an example, in Los Angeles, the busiest port in the US, imports have fallen 16.9% yoy. It is the exporters who are getting hit the hardest and some have cut prices in the process.
The only thing that keeps a veneer of equilibrium is the massive creation of money and credit pumped out by central banks worldwide. We said we had entered depression this past February; and just as when we called the beginning of recession two years before, no one shared our opinion. If we are not in depression, than what is the significance of 20.8% unemployment, a factory utilization level of 65%, and continued massive foreclosures?
As we have said over and over again, the Fed, Treasury, Wall Street and banking are in a box and they cannot get out. They deliberately created this horrible situation, and there is no going back. It is impossible to reverse the process. We are in an economic and financial depression. The palliative supposedly is bigger budget deficits and credit expansion into infinity. We are going to see a replay of the 1970s. Inflation will catch up and overtake deflation one more time, but in the end deflation will prevail.
Fiscal spending is running wild, and our president predicts a budget deficit of $9 trillion dollars over the next ten years. The Congressional Budget Office (CBO) says spending has to be cut 8% permanently over the next several years. In July alone, federal spending rose 26%, as revenues fell 6%. Corporate tax receipts fell 58%, as individual revenues fell 21%.
The official economic contraction is the worst since the great depression. Can you imagine what it really is? 9.4% unemployment is front-page news, but you didn’t hear about the 4.7% loss in salaries and wages of 4.7% for the 12 months ended in June.There are more government employees now than all those employed in manufacturing and construction.
How is it that state employees now make 40% more than the average income in non-governmental jobs? What a perversion of government.It is no wonder that the US poverty rate is higher than in Mexico and Turkey.
U.S. regulators backed down from the tough stance they took a month ago on rules for auctions of troubled banks, clearing the way for more private equity bidders to come back into the game.
A capital requirement for private equity investments in banks was lowered to a Tier 1 common equity ratio of 10 percent, from the 15 percent Tier 1 leverage ratio previously proposed.
The regulators also dropped a requirement that investors serve as a"source of strength" for the bank they buy, which critics said could have put them on the hook for more capital if the institution struggled.
A cross-guarantee proposal — meaning if an investor owns more than one bank , the FDIC can use the assets of the healthier bank to cut losses from the one that has faltered — was modified to only include investors that had an 80 percent common ownership of the two banks...
"On the whole, it's favorable to private equity. It's positive in terms of attracting private equity money," said Brett Barragate, a partner with the Jones Day law firm...
The FDIC also said it would seek comment about whether to phase in the impact on banks' capital requirements of an accounting change that requires institutions to bring off-balance sheet assets back on their books.
By Robert Kuttner, The Boston Globe
August 11, 2009
...One new abuse that should be stopped before it spreads: big private equity companies, which are largely unregulated, are hungry to take over failed banks.Their argument is that the banks need new capital, and the private equity firms have it. But this is a profoundly bad idea.
Today, the FDIC is sitting on an inventory of failed banks that it needs to unload, and an insurance fund that it needs to replenish.Enter shadowy and unregulated private equity outfits like the Carlyle Group and Blackstone Capital, who are circling like vultures.The FDIC has done the hard part — at taxpayer expense: it has eaten the losses and cleaned up the failed banks’ balance sheets, making them appetizing targets...
In earlier deals, the FDIC has bent its own rules somewhat: it doesn’t permit any single private firm to own a bank, but in the $32 billion collapse of Indy Mac last year, the agency permitted a consortium of private equity firms to be the buyer.
Last month, the FDIC proposed to toughen its policy. It put out a draft policy statement for comment, signaling that it would prefer to merge failed banks with other banks, or to find investors other than private equity conglomerates. It proposed to prohibit self-dealing by firms acquiring failed banks, and to exclude firms based in offshore tax-havens. And if a private equity firm acquired a bank, it would be required to have higher ratios of capital because of its inherently riskier business strategies.
The private-equity companies have mounted a fierce lobbying campaign to soften the terms, arguing that the banking industry needs the capital. But the FDIC, the rare agency in this whole crisis that has put the public interest first, should hold the line.
In financial crises, conflicts of interests by insiders tend to mutate. We got into this mess, after all, because federally guaranteed banks were behaving like compulsive gamblers.Let’s not repeat these abuses in new forms.
Service Employees International Union
August 22, 2009
With private equity firms publicly calling for radical change to banking regulations that would ease their investment into the nation's struggling banks, the Service Employees International Union (SEIU) today proposed new rules to protect consumers and working families against the buyout firms' riskiest practices, strengthen long-standing consumer protections, and support stronger banks.
The new principles called for by SEIU — the fastest-growing labor union in the Americas and a leading advocate for better private equity and banking practices — directly address recent moves by a number of leading private equity firms to win special treatment by the Federal Reserve allowing them to take over commercial banks but avoid the current transparency and oversight rules by which other investors must abide.
Allowing private equity to purchase controlling stakes in large banks would undermine long-standing banking regulations and consumer protections by permitting buyout firms to access subsidized funding in the form of FDIC-insured deposits. Special rules could allow buyout firms to sell themselves their own debt at a discounted rate from the banks they want to control.
Under the terms called for by the private equity industry, buyout firms would remain exempt from oversight and transparency rules governing bank holding companies.This kind of special treatment from the Federal Reserve could open the door for private equity firms to assume little responsibility if a bank fails, adding unacceptable risk to taxpayer bailouts of banks deemed "too big to fail" by federal regulators.
After a disastrous foray into banking early last year, private equity is making a cautious comeback with deals such as the BankUnited takeover, and their return will likely change how the industry looks.
Regulators appear to be working with private equity firms looking to buy banks, and in the next year or two several U.S. regional lenders could end up in the hands of buyout funds, banking analysts said.
"I can't picture a 5,000-branch bank coming out of this. But could I see 300-, 400-, 500-branch networks stitched together? I think so," said Seamus McMahon, chief executive of bank consulting firm McMahon Advisory LLC.
"Private equity firms are going to have a lot of influence."
As real estate markets continue to crater, many of the 8,300 U.S. banks will suffer, and some will fail.Private equity funds, meanwhile, have roughly $1 trillion of untapped funds at their disposal.
Some buyout funds are dipping their toes in the water now.
Earlier this year, private equity firm J.C. Flowers & Co. got together with other investors to take over assets of failed mortgage lender IndyMac. In December, MatlinPatterson Global Advisers LLC agreed to invest in Flagstar Bancorp Inc.
After winning the auction for BankUnited, the group led by former North Fork Bank head John Kanas intends to continue growing through further acquisitions that could be rolled into the new bank once it is fixed. One of the targets could be BankAtlantic Bancorp Inc. a person familiar with the consortium said. The source is anonymous because the plans are not public...
Private equity firms have to structure their deals carefully to stay below thresholds that would subject their entire firms to onerous banking regulations. So as many as eight investors pitched in to buy BankUnited. The largest stake holders are Ross, Carlyle and Blackstone, each holding between 20 percent and 24.9 percent, below the level they are deemed to be in control, the source said...
By Heidi N. Moore, Wall Street Journal Blogs
January 5, 2009
...This weekend, a group of seven private equity firms led by Dune Capital bought the carcass of failed Pasadena, Calif., mortgage lender IndyMac.The private-equity firms plan to rebuild it and use it as a platform to acquire other financial institutions, while overhauling IndyMac’s business model to steer clear of risky subprime mortgage loans. Because each of the firms are pitching in some money, no one firm owns more than 10% of IndyMac, thus appeasing federal regulators.
Similarly, in August, private-equity investor J. Christopher Flowers, a veteran of Goldman Sachs Group’s financial-institutions group, bought a little bank in Missouri called First Cainsville Bank. The bank, with $14 million in assets and just two branches, probably wouldn’t normally be considered worthy of the attention of a financial sophisticate like Flowers, who kicked the tires at such massive potential M&A targets as Bear Stearns, American International Group and Washington Mutual and advised on Bank of America’s acquisition of Merrill Lynch. But Flowers saw the Cainsville acquisition as a way to get a foothold into the banking business and make it easier to buy other banks. And instead of buying the bank as part of his private-equity firm, J.C. Flowers, he bought it under his own name, overhauled the board of directors and informed the Office of the Comptroller of the Currency of his plan to make more acquisitions.
Federal regulators have been amenable to such solutions thus far. Perhaps that has something to do with the fact that roughly 25 banks have already failed, and more are expected.
The benefit to the private-equity firms of participating in federal auctions for failed banks is the chance to own cheap assets and gain a toehold in the rapidly consolidating banking industry, which they know well. Private-equity firms plowed $23 billion of capital into financial-services deals in 2008, and that is down 69% decrease from the $74 billion of 2007, according to data from Freeman & Co.
Meantime, the federal government gets a known quantity: private-equity firms that are experienced players in financial services. This is something of an echo of the late 1980s and early 1990s, when some private-equity firms snapped up assets from the government’s Resolution Trust Corp. amid the savings & loan crisis. They are also willing buyers, which is no small comfort to the government. Federal regulators looked for a buyer for IndyMac for five months before finally handing it over to a private-equity consortium.
Still, in taking over banks, private-equity firms are entering somewhat complicated contracts to accept federal bank regulators as highly involved overlords, something not all PE firms have been willing to do. Blackstone Group abandoned its proposed $6 billion acquisition of Alliance Data Systems–which owned a bank — arguing that it wouldn’t be able to meeting the changing requirements of federal regulators. In addition, some banks are allowed to choose their regulator, which creates a confusing drama of regulatory competition. IndyMac, for instance, chose the Office of Thrift Supervision, which ended up looking the other way at the lender’s financial troubles...
Very interesting piece from yesterday's New York Times ("As Investors Circle Ailing Banks, Fed Sets Limits"). Private equity manager J. Christopher Flowers buys a tiny bank in Missouri in the hopes of using its national charter to snap up ailing banks across the country. The last two paragraphs are among the juiciest: Flowers "has estimated his banking empire will one day earn at least a 35 percent return on banks it has bought in the United States. 'I find it to be an extraordinary time to invest,' he said. He was even more blunt when he spoke to an industry group in New York earlier this year. 'Lowlife grave dancers like me will make a fortune,' he predicted.
Cainsville, Mo. — No one seems to want to own a business in this dusty, windswept corner of rural America, population 370, with its crumbling sidewalks and boarded-up storefronts. Except, that is, for J. Christopher Flowers, a media-shy New York billionaire who last year bought the First National Bank of Cainesville, one of the United States’ smallest national banks.
Mr. Flowers, a private equity manager, has no particular love for rural Missouri; in fact, he has never set foot in Cainsville. Rather, he wants to use the national bank charter he picked up in this farm town to go on a nationwide buying spree.
With that charter in hand, Mr. Flowers plans to take over a handful of large struggling banks, casualties of the economic crisis. In some cases, he hopes, the federal government will help...
For all the talk of the banking crisis, Mr. Flowers and other giant private equity players are circling distressed banks around the country, competing to buy into the industry. Bidding wars are now breaking out among private equity firms, including the Carlyle Group, which is going up against Mr. Flowers’s firm for a stake in BankUnited of Florida.
They and other investors see banks as the recession’s biggest prize: potential money machines that could one day generate fabulous returns, particularly after the federal government eats the losses of failed banks, then heavily subsidizes their sale. But like Mr. Flowers, some of them would prefer to take over the banks completely, replace their managements and take all the profit.
“I don’t think the Republic is going to be brought to its knees if private equity owns banks, personally,” Mr. Flowers said from his Midtown Manhattan office with its expansive views of Central Park. “We invest around the world — Japan, Germany, England, no problem.”
The Fed is resisting this pitch, for several reasons. Current law prohibits mixing banking and commerce, based on a fear that if industrialists own banks, they will dominate — and try to manipulate — the economy, as they did during the early-20th-century heyday of John Pierpont Morgan.
The government also wants the ability to stabilize a teetering bank by drawing on the funds of its parent company. That is hard to do with private equity firms, which have numerous businesses owned by funds, each of which is walled off to protect investors.
For these reasons, banks generally cannot be owned by nonfinancial companies like the Carlyle Group, whose assets are as varied as an interest in Dunkin’ Donuts and United Defense Industries, a maker of combat vehicles and missile launchers.
The equity firms counter that banking desperately needs cash if the economy is going to recover, and that they are the only big sources of money around. An executive at the Carlyle Group said the industry had an estimated $400 billion in “dry powder,” or ready-to-invest reserves.
While they press their case, the firms have found some ways around the rules.
They have formed so-called club deals, in which teams of private equity firms and other investors each buy up to the legal limit of a bank — about a quarter or a third, depending on the type of bank — with their individual pieces adding up to 100 percent control. IndyMac, the failed California bank, was sold by the Federal Deposit Insurance Corporation last fall to one such club, which includes funds controlled by Mr. Flowers; the hedge fund billionaires George Soros and John Paulson; and Michael S. Dell, founder of the Dell computer company. The investors are barred from acting in concert to, in effect, take control of the bank — an unwieldy arrangement but one that regulators insist they can enforce.
As part of the IndyMac deal, the FDIC agreed to take most of the risk from future losses on loans acquired by the partnership — leading Mr. Flowers to quip at one investor forum in New York in January that “the government has all the downside and we have all the upside.”
Mr. Flowers has come up with another way around the restrictions.There is no limit on an individual’s taking over a bank, so he purchased all of the First National Bank of Cainesville in his own name and with his own funds. But that deprives him of the billions his equity firm has set aside to buy banks, so his new bank sits in this tiny town, waiting for a change in the rules.
First National — whose second story is boarded up and whose $17 million in assets are worth about a third of what Mr. Flowers paid for an Upper East Side town house in 2006 — seems an unlikely launching pad for a new American banking empire. It is so tradition-minded that it refused to change the spelling of its name, even after the town did so back in 1925 to honor its founder, Peter Cain. Suddenly, in February, the First National Bank name was dropped and “Flowers Bank” was painted on the window. New bank executives showed up, passing out packs of promotional sunflower seeds with the bank’s new logo, urging the mostly elderly town residents to get ready to “Grow with Us.”
“Everyone wonders, who is this Flowers guy?” said Lefty McLain, as he finished up the ham, mashed potatoes and butter beans lunch special at the Little Store, an all-in-one restaurant, deli, pool hall and gossip post here in the one-block downtown.
Mr. Flowers, while still in his 20s, founded Goldman Sachs’s financial services merger business, helping line up the $62 billion merger of NationsBank and BankAmerica (now Bank of America) and the $34 billion takeover of Wells Fargo by Norwest...
Mr. Flowers and other executives have lobbied hard; their efforts have included a recent meeting with William C. Dudley, chairman of the New York Fed. At the meeting, Mr. Flowers and his colleagues bragged about how they could raise as much as $10 billion in 48 hours to help with a bank takeover if they were given the chance, according to one executive in attendance.
Mr. Flowers, in an interview, said he was confident he would prevail. Even if he cannot make the Fed reverse its policy, he will consider it a victory if the Fed approves an individual deal. He has estimated his banking empire will one day earn at least a 35 percent return on banks it has bought in the United States. “I find it to be an extraordinary time to invest,” he said. He was even more blunt when he spoke to an industry group in New York earlier this year.
“Lowlife grave dancers like me will make a fortune,” he predicted.
As 2002 ended and 2003 began, the private equity sector, had spent the previous three two and a half years reeling from major losses in telecommunications and technology companies and had been severely constrained by tight credit markets. As 2003 got underway, private equity began a five year resurgence that would ultimately result in the completion of 13 of the 15 largest leveraged buyout transactions in history, unprecedented levels of investment activity and investor commitments and a major expansion and maturation of the leading private equity firms.
The combination of decreasing interest rates, loosening lending standards and regulatory changes for publicly traded companies would set the stage for the largest boom private equity had seen. The Sarbanes Oxley legislation, officially the Public Company Accounting Reform and Investor Protection Act, passed in 2002, in the wake of corporate scandals at Enron, WorldCom, Tyco, Adelphia, Peregrine Systems and Global Crossing among others, would create a new regime of rules and regulations for publicly traded corporations. In addition to the existing focus on short term earnings rather than long term value creation, many public company executives lamented the extra cost and bureaucracy associated with Sarbanes-Oxley compliance.
For the first time, many large corporations saw private equity ownership as potentially more attractive than remaining public. Sarbanes-Oxley would have the opposite effect on the venture capital industry. The increased compliance costs would make it nearly impossible for venture capitalists to bring young companies to the public markets and dramatically reduced the opportunities for exits via IPO. Instead, venture capitalists have been forced increasingly to rely on sales to strategic buyers for an exit of their investment.
Interest rates, which began a major series of decreases in 2002 would reduce the cost of borrowing and increase the ability of private equity firms to finance large acquisitions. Lower interest rates would encourage investors to return to relatively dormant high-yield debt and leveraged loan markets, making debt more readily available to finance buyouts. Additionally, alternative investments also became increasingly important as investors focused on yields despite increases in risk. This search for higher yielding investments would fuel larger funds and in turn larger deals, never thought possible, became reality.
Certain buyouts were completed in 2001 and early 2002, particularly in Europe where financing was more readily available. In 2001, for example, BT Group agreed to sell its international yellow pages directories business (Yell Group) to Apax Partners and Hicks, Muse, Tate & Furst for £2.14 billion (approximately $3.5 billion at the time),[69] making it then the largest non-corporate LBO in European history. Yell later bought US directories publisher McLeodUSA for about $600 million, and floated on London's FTSE in 2003.
Resurgence of the large buyout
Marked by the two-stage buyout of Dex Media at the end of 2002 and 2003, large multi-billion dollar U.S. buyouts could once again obtain significant high yield debt financing and larger transactions could be completed. The Carlyle Group, Welsh, Carson, Anderson & Stowe, along with other private investors, led a $7.5 billion buyout of QwestDex. The buyout was the third largest corporate buyout since 1989. QwestDex's purchase occurred in two stages: a $2.75 billion acquisition of assets known as Dex Media East in November 2002 and a $4.30 billion acquisition of assets known as Dex Media West in 2003. R. H. Donnelley Corporation acquired Dex Media in 2006. Shortly after Dex Media, other larger buyouts would be completed signaling the resurgence in private equity was underway. The acquisitions included Burger King (by Bain Capital), Jefferson Smurfit (by Madison Dearborn), Houghton Mifflin[70][71] (by Bain Capital, the Blackstone Group and Thomas H. Lee Partners) and TRW Automotive by the Blackstone Group.
In 2006 USA Today reported retrospectively on the revival of private equity:
LBOs are back, only they've rebranded themselves private equity and vow a happier ending. The firms say this time it's completely different. Instead of buying companies and dismantling them, as was their rap in the '80s, private equity firms… squeeze more profit out of underperforming companies.
But whether today's private equity firms are simply a regurgitation of their counterparts in the 1980s… or a kinder, gentler version, one thing remains clear: private equity is now enjoying a "Golden Age." And with returns that triple the S&P 500, it's no wonder they are challenging the public markets for supremacy.
By 2004 and 2005, major buyouts were once again becoming common and market observers were stunned by the leverage levels and financing terms obtained by financial sponsors in their buyouts. Some of the notable buyouts of this period include: Dollarama (2004), Toys "R" Us (2004), The Hertz Corporation (2005), Metro-Goldwyn-Mayer (2005) and SunGard (2005).
As 2005 ended and 2006 began, new "largest buyout" records were set and surpassed several times with nine of the top ten buyouts at the end of 2007 having been announced in an 18-month window from the beginning of 2006 through the middle of 2007. Additionally, the buyout boom was not limited to the United States as industrialized countries in Europe and the Asia-Pacific region also saw new records set. In 2006, private equity firms bought 654 U.S. companies for $375 billion, representing 18 times the level of transactions closed in 2003.
Additionally, U.S. based private equity firms raised $215.4 billion in investor commitments to 322 funds, surpassing the previous record set in 2000 by 22% and 33% higher than the 2005 fundraising total. However, venture capital funds, which were responsible for much of the fundraising volume in 2000 (the height of the dot-com bubble), raised only $25.1 billion in 2006, a 2% percent decline from 2005 and a significant decline from its peak. The following year, despite the onset of turmoil in the credit markets in the summer, saw yet another record year of fundraising with $302 billion of investor commitments to 415 funds.
Although there had previously been certain instances of publicly traded private equity vehicles, the convergence of private equity and the public equity markets attracted significantly greater attention when several of the largest private equity firms pursued various options through the public markets. Taking private equity firms and private equity funds public appeared an unusual move since private equity funds often buy public companies listed on exchange and then take them private. Private equity firms are rarely subject to the quarterly reporting requirements of the public markets and tout this independence to prospective sellers as a key advantage of going private. Nevertheless, there are fundamentally two separate opportunities that private equity firms pursued in the public markets. These options involved a public listing of either:
A private equity firm (the management company), which provides shareholders an opportunity to gain exposure to the management fees and carried interest earned by the investment professionals and managers of the private equity firm. The most notable example of this public listing was completed by The Blackstone Group in 2007.
A private equity fund or similar investment vehicle, which allows investors that would otherwise be unable to invest in a traditional private equity limited partnership to gain exposure to a portfolio of private equity investments.
In May 2006, Kohlberg Kravis Roberts raised $5 billion in an initial public offering for a new permanent investment vehicle (KKR Private Equity Investors or KPE) listing it on the Euronext exchange in Amsterdam (ENXTAM: KPE). KKR raised more than three times what it had expected at the outset as many of the investors in KPE were hedge funds seeking exposure to private equity but could not make long term commitments to private equity funds. Because private equity had been booming in the preceding years, the proposition of investing in a KKR fund appeared attractive to certain investors. However, KPE's first-day performance was lackluster, trading down 1.7% and trading volume was limited. Initially, a handful of other private equity firms and hedge funds had planned to follow KKR's lead but shelved those plans when KPE's performance continued to falter after its IPO. KPE's stock declined from an IPO price of €25 per share to €18.16 (a 27% decline) at the end of 2007 and a low of €11.45 (a 54.2% decline) per share in Q1 2008.[80] KPE disclosed in May 2008 that it had completed approximately $300 million of secondary sales of selected limited partnership interests in and undrawn commitments to certain KKR-managed funds in order to generate liquidity and repay borrowings. Schwarzman'sBlackstone Group completed the first major IPO of a private equity firm in June 2007.
On March 22, 2007, the Blackstone Group filed with the SEC to raise $4 billion in an initial public offering. On June 21, Blackstone swapped a 12.3% stake in its ownership for $4.13 billion in the largest U.S. IPO since 2002. Traded on the New York Stock Exchange under the ticker symbol BX, Blackstone priced at $31 per share on June 22, 2007.
Less than two weeks after the Blackstone Group IPO, rival firm Kohlberg Kravis Roberts filed with the SEC in July 2007 to raise $1.25 billion by selling an ownership interest in its management company. KKR had previously listed its KKR Private Equity Investors (KPE) private equity fund vehicle in 2006. The onset of the credit crunch and the shutdown of the IPO market would dampen the prospects of obtaining a valuation that would be attractive to KKR and the flotation was repeatedly postponed.
Meanwhile, other private equity investors were seeking to realize a portion of the value locked into their firms. In September 2007, the Carlyle Group sold a 7.5% interest in its management company to Mubadala Development Company, which is owned by the Abu Dhabi Investment Authority (ADIA) for $1.35 billion, which valued Carlyle at approximately $20 billion.
Additionally, Apollo Management completed a private placement of shares in its management company in July 2007. By pursuing a private placement rather than a public offering, Apollo would be able to avoid much of the public scrutiny applied to Blackstone and KKR. In April 2008, Apollo filed with the SEC to permit some holders of its privately traded stock to sell their shares on the New York Stock Exchange. In April 2004, Apollo raised $930 million for a listed business development company, Apollo Investment Corporation (NASDAQ: AINV), to invest primarily in middle-market companies in the form of mezzanine debt and senior secured loans, as well as by making direct equity investments in companies. The Company also invests in the securities of public companies.
Historically, in the United States, there had been a group of publicly traded private equity firms that were registered as business development companies (BDCs) under the Investment Company Act of 1940. Typically, BDCs are structured similar to real estate investment trusts (REITs) in that the BDC structure reduces or eliminates corporate income tax. In return, REITs are required to distribute 90% of their income, which may be taxable to its investors. As of the end of 2007, among the largest BDCs (by market value, excluding Apollo Investment Corp, discussed earlier) are: American Capital Strategies (NASDAQ: ACAS), Allied Capital Corp((NASDAQ:ALD), Ares Capital Corporation (NASDAQ:ARCC), Gladstone Investment Corp (NASDAQ:GAIN) and Kohlberg Capital Corp (NASDAQ:KCAP).
The Observer Originally Published on September 25, 2005
Private equity firms accounted for more than half of all merger and acquisition activity in the first half of the year, according to research published today. This is the first time venture capitalists have eclipsed trade buyers and other companies in the deal tables.
'Secondary' buyouts - where one private equity firm buys from another - have also grown dramatically, accounting for 40 per cent of all deals, compared with just 5 per cent five years ago.
Four of the top five buyouts - Travelex, Priory Group, Kwik-Fit and Tussauds - were in this category, while 'traditional' buyouts from industrial companies, which used to be in the majority, accounted for just 15 per cent of deals.
Last month, the Gala bingo group was passed to its fifth private equity owner, while some private equity firms are buying back companies they have previously owned.
'It remains to be seen whether this level of secondary activity is sustainable, and indeed desirable,' said Tom Lamb, co-head of Barclays Private Equity, one of the sponsors of the research. He warned that some investors hold stakes in several buyout funds and may not be happy with investments simply being transferred between them.
Overall, the Centre for Management Buyout Research found a 24 per cent increase in private equity deals, to £17.5 billion so far this year, and it predicts that 2005 will be another record year.
The findings are likely to fuel concern about the activities of private equity firms: huge swathes of the retail, leisure and food industries are now owned by venture capitalists and a growing number of company directors are being attracted into the industry.
The deeply indebted company recently announced plans to sell bonds. Expect many others to follow suit.
Forbes Originally Published on June 19, 2009
Consider it a test of the bond market's appetite. The broadcaster Univision Communications, bought by five private-equity firms in 2007, recently announced plans to sell bonds. Univision's bonds sport a CCC-rating from Standard & Poor's, near the bottom of the credit scale, and it carries $10 billion in debt -- a whopping 12 times earnings.
And like other media companies, it's struggling: Univision's first-quarter interest expenses reportedly surpassed operating income. In March, the company even stopped paying interest to holders of certain bonds and handed them more IOUs instead.
The corporate credit rally has lifted the prices on some of the lowest-rated and riskiest junk bonds, an encouraging sign to Univision and others with towering leverage ratios. It's also prompted some in the bond market to wonder if investors have become too indiscriminate. The KDP Investment Advisors High-Yield Index is up 22.9% this year and 1.4% in June.
Investors seem unafraid of newly issued junk bonds. Speculative-grade borrowers sold $3.5 billion in the past week, up from $1.9 billion the previous week, according to Bloomberg. Among those issuing bonds: cable company Comcast ( CMCSA - news - people ) with $700 million at 5.7%, retailer Limited Brands ( LTD - news - people ) with $500 million at 8.5% and fast-food chain Wendy's/Arby's Group with $565 million at 10%.
If Univision completes the bond sale, the cash will be used to pay off $500 million in 7.85% notes that mature in 2011, so the company may stretch its maturities and wind up with the same debt load.
It's widely expected that the debt used to finance leveraged buyouts will drive many private equity-owned companies into bankruptcy this year. Even so, some leverage-buyout debt looks surprisingly strong. Take the hospital chain HCA, which is shouldering $26 billion in debt, six times its earnings; HCA's 9.25% notes due in 2016 are trading at 99 cents on the dollar. Or SunGuard, the software services company bought by a consortium of private-equity firms in 2005, whose 9.125% notes due in 2013 trade at 96 cents on the dollar.
Defaults, however, continue to pile up. Another five U.S. companies defaulted in the past week, of which only Eddie Bauer filed for bankruptcy, according to S&P.
More companies could choose to sell additional junk bonds rather than pay interest to investors as they try to conserve cash in a weakening economy.
Along with drawing down revolving lines of credit and exchanging old debt for new, this is another sign that some firms are experiencing financial distress in the current economic environment, analysts said.
The option to pay interest with debt is available to companies that sold pay-in-kind (PIK) toggle bonds when bondholders were lending money to junk companies on easier terms before the credit crunch hit.
The structure provides a lifeline to distressed firms, allowing them to preserve cash and likely avoid defaults, but bondholders are now exposed to potential losses.
"We are going to have a problem over the next couple of years because of the history of these toggle bonds that have been sold in the high yield market," said John Atkins, credit analyst at research firm IDEAglobal in New York.
"Instead of paying cash on the interest, you just issue more bonds. The debt becomes worth incrementally less over time if they continue to dump more bonds into the pool," he added.
The number of companies that are using this option is on the rise. Out of 43 bond deals that have a PIK feature totaling $23.5 billion, eight have paid interest with debt or announced plans to do so, according to Standard & Poor's Leveraged Commentary and Data.
The latest announcement came last week from silicone producer Momentive Performance Materials, which said it would pay interest on $300 million of its 10.125 percent notes due on December 1 with more debt. Momentive was the third company owned by billionaire investor Leon Black's private equity firm Apollo Management that chose to exercise its PIK option. The other two were real estate and relocation services provider Realogy Corporation and jewelry retailer Claire's Stores.
Harrah's Entertainment, the world's largest casino operator and another Apollo Management sponsored issuer, has until August 1 to make a decision on exercising the PIK option, Lehman Brothers said in a research note.
This trend "has a potential to lead to large price movements in cases where the decision to exercise the option comes as a surprise," Lehman Brothers said.
For example, Momentive's 10.125 percent notes due in 2014 dropped to 86.5 cents on the dollar on May 28 when the announcement was made from 93.375 cents on the dollar on May 20, according to MarketAxess. The yield surged to 13.29 percent from 11.6 percent.
This bond structure was popular with leveraged buyouts which proliferated before the credit crunch hit in the middle of summer 2007.
Private equity firms were active in the leisure businesses such as hotels, gaming and restaurants. Profits in this industry and other cyclical sectors are getting squeezed as food and oil prices soar and consumers spend less on travel and entertainment while they fear the slower economy will cost them jobs.
"The fact that issuers are taking that option to make interest payments with further debt indicates that they are suffering some financial distress," said Kenneth Emery, senior vice president at Moody's Investors Service (MCO.N) in New York.
Corporate America's credit quality is sinking at a record pace as the subprime housing crisis takes a toll.
Credit rating downgrades and warnings by Moody's are on pace to hit a record $1.6 trillion in the second quarter, topping the massive credit deterioration seen in the bankruptcy wave of 2001.
Standard & Poor's, a unit of McGraw-Hill (MHP.N), said the number of companies around the world at risk of a credit downgrade climbed to a record in May. These rates could have been even higher if weak companies could not sell more debt rather than pay out interest.
Some companies choose this PIK option because they can use cash meant for the interest payment to buy back outstanding debt in the secondary market, which could reduce the total debt burden.
"It's really affecting the default rate," said Mirko Mikelic, senior fixed income analyst at Fifth Third Asset Management in Grand Rapids, Michigan. "It's given firms a lot more leeway."
When new owners took over an apartment building in the New York City borough of Queens, they promptly set about filing eviction notices, suing nearly half of the building's tenants — some of them multiple times — within the first 16 months. That amounted to 965 court proceedings against 2,124 apartments, compared with just 50 court proceedings in the final year of the previous owner. The complaints alleged that the tenants were subletting illegally or had not paid their rent or security deposits, even though the tenants often had records proving otherwise.To the tenants, it seemed as though every possible legal vulnerability was being sought out in an effort to force them out.
This kind of activity — flushing out low-rent tenants and replacing them with wealthier new renters — has been a staple of strong real estate markets for years. What was different over the past few years was how widespread this Dickensian business model had become, largely fueled by Wall Street money seeking high rates of return. Another difference was how much the general investing public — through university endowments and pension funds — became party to such morally dubious schemes. Consider it another footnote to the Gilded Age we just passed through.
This investment trend, which flourished from 2005 until the financial crisis hit in 2008, threatened a cherished pillar of urban policy — affordable housing, which has long been regarded as essential for maintaining vibrant diversity in our cities. The victims are among the huge numbers of Americans (estimated at close to 100 million before the latest housing boom promoting homeownership) who rent their primary residences — poor, working-class and even middle-class folks — who have been overshadowed in the deluge of media coverage of the debacle in single-family housing. (Affordable housing refers to that costing no more than a third of a family's income.)
But as private equity funds seized on the rental market in major cities in recent years, all this was jeopardized by the need to generate fat returns of 15%-20% per annum.Worse, this business model was based on a dirty secret — expelling as many existing tenants as possible. This is the thuggish reality behind otherwise respectable-sounding prospectuses offered to investors to explain how they could service high debt on mortgage-backed securities.
"The borrower anticipates to recapture approximately 20%-30% of the units [roughly within the first year] and 10% a year thereafter," explained a prospectus for a portfolio of buildings in upper Manhattan being bought by Apollo Real Estate Advisers (now AREA Property Partners), with a primary mortgage from a Credit Suisse subsidiary.
The normal turnover rate in cheap or moderate rent-regulated apartments in New York City is 5.6%, according to data from the New York City Rent Guidelines Board.
"From a public policy standpoint, you can make a strong case that it is not desirable [for Wall Street money to be in this market], and equally strong you can say that housing regulators or authorities in New York and most other cities have been asleep at the wheel for the last five and 10 years — this stuff is going on everywhere," says Guy Cecala, CEO of Inside Mortgage Finance Publications, a stable of industry newsletters, who worries that the very idea of affordable housing is under threat.
But these securitized transactions were considered a legitimate business strategy by investors, who typically focus on the cash flow from these deals, not the fine points on how cash is generated.
"These could have all been brothels or sweatshops underlying them, and nobody would know that either," says Cecala, who notes that "one of the reasons for buying securities ... is supposedly you don't have to worry about any of that; someone else is supposed to have signed off on the legality of the transactions, the business practices, everything."
Those packaging these investments say they regarded them as aboveboard, though their defense is less than robust. Key players included leading banks in tandem with some of the biggest names in real estate and private equity, none of whom would have missed that high tenant turnover was the main motor for profits.
"We truly went into this trying to turn housing that was run very, very poorly by slumlords into affordable working-class housing, and to be portrayed like this is somewhat upsetting, to be quite frank," says Richard Mack, who works at AREA Property Partners, a $9 billion partnership, with his father William, who got his start in 1963 with a 5-acre plot of New Jersey swampland. The turnover targets were perhaps "more aggressive than people think they should have been," but he says, "Life is too short for us to have done this, with this small a part of our portfolio, if we didn't actually think we were doing the right thing. Whether or not we executed as perfectly as we could — I'm sure that we made mistakes — our true intention here was to make money by doing good."
Tenants pried from their homes would see it differently. In a typical Queens building, hired legal guns were able to achieve 23% turnover in the first year of new owners, or about double that of a typical building in Manhattan, where the culture of tenant rights is stronger, according to a new study by affordable-housing advocates, the Association for Neighborhood and Housing Development.
The study focused on New York City, where Wall Street money made the most inroads — capturing about 100,000 units (out of the city's 2.5 million), or about 10% of the city's rent-regulated apartments before the real estate bubble collapse.
In this process, the report explains, the investor-owners were helped by the fact that many transitional neighborhood tenants were new (and possibly undocumented) immigrants, whose lack of English fluency and legal representation put them at a disadvantage in housing court, where deals are typically hammered out with owners' lawyers before ever reaching the judges. Those actually executing these orders were often conflicted about it.
"Having a large property owner as a client is great for the volume of work, but if you ask me about it morally or ethically, well, I'd rather not say," admits a housing court attorney who asked not to be identified.
Others are inclined to give big investors the benefit of the doubt.
"If people are really stretching the law — doing outright harassment to remove tenants — that's not a good thing, but I don't think that most big institutional investors knowingly will target deals like that or knowingly target deals with partners where they think that might happen," says Andy McCulloch, senior residential analyst with Green Street Advisors, a property research shop.
In the end, though, many new owners have been unable to meet their overly ambitious rent roll increase targets,and many of these investments are in danger of buckling under the high debt servicing costs. Finance industry watch lists are already full of private-equity-financed deals in danger of default. That has local officials scrambling to find "preservation buyers" who are willing to take on these properties with the expectation of a more modest 7%-8% annual return.
"I do think it is a problem ... and that's why we are putting our resources to bear to try to correct the problem before it becomes a bigger problem than we can tackle," says Rafael Cestero, commissioner of New York's Department of Housing Preservation and Development.
"Ownership of rental properties in New York City is a long-term proposition, and if you do it right, you can make a fair profit, but trying to make a short-term investment is where you can get yourself in trouble."
Nowhere was that more true than in the ill-conceived investment to turn the twinned 11,000-unit middle-class housing complex known as Stuyvesant Town and Peter Cooper Village, built originally to accommodate World War II veterans, into luxury housing, for which limits on yearly rent increases are chucked in favor or whatever the market will bear. The prospectus offered by the lead investors, Tishman Speyer and Larry Fink's asset-management fund BlackRock, imagined evicting 50% of rent-regulated tenants in just a few years. But tenants fought back and won in a court decision that also undercut plans for using city tax abatements to further sweeten returns on apartments pushed into luxury decontrol. The upshot, according to a recent Deutsche Bank analysis, is that the property, purchased in late 2006 for $5.4 billion, "would fetch less than $2 billion if sold into the current dislocated market." It added that the most natural buyer was MetLife, the insurer and original owner, in part because it represented "patient capital."
