Levered, Tax Hating PEUs Are Debt Hawks?

Semafor reported:

“Our national fiscal trajectory is unsustainable,” Hank Paulson said. “The national debt we have will ultimately, if unchecked, destroy our economic well-being and our national security, which is rooted in the economy.” 

 The sheer amount of debt doomerism I heard this week was notable. The U.S. will spend more this year paying the interest on its $35 trillion debt than on either national defense or Medicare, according to the Congressional Budget Office — and that forecast assumed rates would start coming down in June, which looks increasingly unlikely. 

“Nobody seems to be worried that much” about America’s soaring debts, David Rubenstein said, “in part because people have been willing to buy our Treasury bills. At some point people won’t be willing to do that.” He reminded us that the Dutch guilder was once the world’s reserve currency. 

It’s easy to brush off Paulson and Rubenstein as hawks whose aversion to debt is generational and personal. Paulson was a spendthrift even when he ran Goldman Sachs, living in a 1,200-square-foot apartment and once returning a new winter coat his wife, Wendy, found too showy. Rubenstein grew up poor in Baltimore, worked in the Reagan White House, and, to hear him tell it, recently bought the Orioles as a bit of “patriotic philanthropy.”

Both Hank Paulson and David Rubenstein are private equity underwriters (PEU).  Rubenstein co-founded The Carlyle Group while Paulson founded and is executive chairman of TPG Rise Climate, the climate investing platform of the global private equity firm TPG.

Several items seem out of place.  First, David Rubenstein worked in the Carter White House, not Ronald Reagan's.  Second, the PEU boys love debt.  They hate paying taxes.

Rubenstein's firm levered Carlyle Capital Corporation out the wazoo with debt 30x equity.  A signature PEU move is to saddle affiliates with more debt to pay a sponsor dividend, aka liquidity recap.  A better term would be dividend bleeding.  

This is the first time I read Rubenstein's purchase of the Baltimore Orioles fit under "patriotic philanthropy."  That usually translates to "gigantic tax write off."  Will it drop Mr. Rubenstein's tax rate below 10%?

Update 4-23-24:  Semafor provided the following graphic today.  I adapted it slightly for this blog.

Also, it is important to remember how hard David Rubenstein worked over the last fifteen years to keep private equity's preferred "carried interest" taxation.  Frequent trips to Capital Hill, phone calls from senators and the most recent "Hail Kyrsten Sinema save" kept Mr. Rubenstein and his PEU peers happy.  It did worsen the deficit he claims to be so concerned about.

Carlyle's BeautyCounter Foreclosed

It took three short years for The Carlyle Group to run BeautyCounter, with its $1 billion valuation, into foreclosure.  Founder Gregg Renfrew will buy back the company carcass from Carlyle, despite having remained with Beautycounter in various roles under private equity underwriter (PEU) ownership.

Four days ago Beautycounter terminated its agreement with independent sellers, legally known as brand advocates.  When Carlyle purchased the company it had more than 65,000 independent sellers in North America.  Their termination notice stated:

The company is shutting down its operations and intends to wind-down and dissolve in the near-term.

Of course it invoked its confidentiality clause.  

Glassdoor is already full of scathing assessments of Carlyle's horrific ownership of BeautyCounter.  I can't imagine what will be added in the near future.  Who can beat the following employee review?

If your idea of career fulfillment and growth looks like a hellish Groundhog’s Day experience where you attempt to climb a hill during a toxic mudslide with zombies on the attack, Beautycounter may be a good workplace fit. If you are a competent, sane, and hard-working individual who values competency, sanity, integrity, and ethical leadership, think thrice before joining this “company.” Good news is, you’ll probably never have the opportunity because judging from the ever-ending promotion cycles and constant, ill-planned layoffs, the company will be lucky to survive through 2024. 

Beautycounter’s products are the self-proclaimed cleanest in the industry (and they are decent products to the credit of the R&D and product development teams), but its culture is as toxic as it comes. 

Working here feels like a dystopian version of The Office meets The Hunger Games, where a cult of mean girls in positions of power or nepo friends of the founder desperately swirl, spin, cling, and claw onto anything they can do to help save this flailing and failing not-MLM-MLM at any cost. For the past few years, it’s been a revolving door of mostly freshman C-Suite executives who attempt to turn the business around, only to fail miserably due to political roadblocks or their own ego and ineptitude, leaving a confusing mess in their wake for the brand and its employees. 

The culture is the ugliest intersection between cutthroat corporate antics and the wild startup west. Everyone in leadership wants power and control, and no one wants to take any ownership or accountability. The bright light is there is/was a small cohort of amazing and well-liked VPs and Directors who brought legitimate experience, fresh energy, and strategic thinking to the business, only to be blocked by their vertical’s C-Suite sponsor at every chance, creating a negative trickle-down effect. Almost all the aforementioned middle-senior management got laid off because they challenged the system or left on their own accord because they had enough. 

Noting that while all companies have problems and it’s tough to be in the C-Suite, there have been four C-Suite turnovers since the start of the pandemic, and with the exception of the current CTO, a 100% C-Suite turnover since May of 2023. You don’t need to be a math major to know those stats are not great. But worse became worst when the board and ex-CEO, Marc Rey, decided to part ways in May, and they appointed an interim CEO who has an HR background, came from the board of directors, and is a former employee of The Carlyle Group (the private equity firm that acquired Beautycounter in 2021). Holy conflict of interest, Batman! 

She is an unseasoned, delulu nepo-friend-of-the-founder executive who thinks that love is going to save the business and has made the short-sided, desperate decision to bring back the megalomaniac, one-hit-wonder founder to help bring this brand to its mid-2000s glory along with a slurry of ex-employees who were instrumental in creating the foundational problems that plague this company to date. Seems like her rose-colored glasses are too thick to see the world has changed. 

After a multi-million dollar company all-in in Santa Monica, she ruthlessly made the decision to have two rounds of layoffs in a three-month period, including many super smart, engaged, and talented folks and ascending and promoting the worst offenders and performers. The problematic fire-and-ice duo that was the CMO and CCO both mysteriously “stepped down” from their roles shortly after. I can only imagine there will be a fourth layoff round of the year once a few high-profile tech projects get off the ground. 

All in all, this place might have an admirable mission on paper, but they are not a legitimate business. It’s a scary sorority of unserious privileged people cosplaying professionals. Everyone else will churn or be kicked out as soon as possible.

Another employee offered: 

...it's been a mess for quite some time. We have no resources. We have no empathy. We have nowhere to go without fear of retaliation or getting on someone's bad side. B-Corporations especially should not be able to act this way. Good intentioned people beware...they only care about what you can produce. Even when you do, you may wake up to a pink slip due to business being down...right after a multi-million dollar company conference.

So much for fast-track growth...    Business of Fashion reported:

Operations will be paused for two weeks, and Beautycounter will officially relaunch on May 1; existing retail partnerships, like those with Ulta Beauty, will remain intact.

Sounds like a supply chain disruption.  Carlyle has an AI tool for that.

... transforms the way organizations identify and manage risk, reduce cost and increase resilience across their supplier and third-party ecosystems. 

Will they market it to those 65,000 former brand advocates?

BeautyCounter's carcass may fly higher without a PEU around its neck to weigh it down.  Then again, PEU ownership may have inflicted a mortal wound.

Update 4-23-24:  Jay Sammons left Carlyle and BeautyCounter for SKKY Partners with Kim K.  Axios reported lagging fundraising for the fund which has 20% carried interest.

Global Cosmetics News reported BeautyCounter "regains independence" and is now free from Carlyle.

Another Red Team PEU Candidate

Former CEO of Bridgewater Associates David McCormick is running for the U.S. Senate in Pennsylvania.  This super rich "man of the people" made the NYT for misrepresenting his upbringing. 

Voters might assume anyone "raised on a family farm" is the son of actual farmers.  Not so.  McCormick has more in common with Sam Bankman Fried given his father's job as university President and his mother's raising of Arabian horses.

McCormick's bio shows his forays between public service and Bridgewater: 

David McCormick is CEO of Bridgewater Associates, responsible for overseeing the firm’s strategy, governance, and operations. David joined Bridgewater in 2009 and previously served as President and then Co-CEO before becoming CEO in 2020. Before joining Bridgewater, David was the U.S. Treasury Under Secretary for International Affairs in the George W. Bush Administration during the global financial crisis, and prior to that served in senior posts on the National Security Council and in the Department of Commerce. 

From 1999-2005 David was a technology entrepreneur, serving as CEO and then President of two publicly-traded software companies, FreeMarkets, Inc. and Ariba, Inc., and prior to that was a consultant at McKinsey & Company.

Bridgewater Associates is the largest hedge fund in the world, requiring a minimum $7.5 billion investment..  Bridgewater claims to be an "idea meritocracy."  The $7.5 billion entry fee instantly throws that into the trash bin.  It's a firm oriented to gargantuan wealth.  Consider this employee review from Glassdoor:

An implicit caste system based on degree of family wealth and where you went to undergraduate school. 

-Not actually transparent at upper levels - Unclear to me if people promoted, actually deserved it - Turnover was brutal in that people kept leaving after 2 years and there were barely anyone at that 3-8 year range - Brutal hours - I also look at the other reviews and genuinely wonder if they're fake by HR - Hides under a veneer of meritocracy but ultimately it's office politics like everywhere else - The metrics to define your impact really depends on the agenda your manager has, not what you think will add impact. Remember that. Normally this is obvious, except that Bridgewater likes to hide under the idea of letting the best ideas succeed, it doesn't.

Voters who've worked for a private equity underwriter (PEU) acquired firm know the trauma the greed and leverage boys wreak on staff and quality operations.  Hedge funds are a close cousin to private equity as they are a levered bet, for or against future success of corporate debt/equity.  Many private equity underwriters have their own hedge funds.  Bear Sterns' hedge fund collapses were the canary in the 2008 Financial Crisis coal mine.

McCormick's comfortable academic upbringing turned into a bonanza adulthood. Business Insider reported:

According to his 2024 financial disclosure, McCormick and his wife own at least $123 million in assets, which would make him one of the wealthiest members of Congress if elected. 

Somewhere between $1.1 million and $2.25 million are held in an account called "David H McCormick 2020 Dynasty Trust."

Voters are sick of political takers who can't seem to get enough power, prestige and the chance to furter distort the system to the advantage of their PEU peers.  Government catered to this bunch for decades and now the greed and leverage boys want to occupy the actual seats of power, legislative and executive.

Adding another obscenely wealthy, tax avoiding Red Senator could dismantle Social Security and other safety net programs.  Politicians Red and Blue love PEU and increasingly, more are one.  

Amid Biden State Dinner Attendees

Yesterday I perused the attendee list from the recent White House state dinner for Japanese Prime Minister Kishida Fumio.  In my search for current and former private equity underwriters (PEU) some obvious names stood out:

Ajay Banga - General Atlantic

Jon Gray - Blackstone

Anthony Blinken - Pine Island Partnera

Bill Clinton - Yucaipi, Teneo, Ecobridge

Lisa Jackson - Galvanize Climate Solutions 

I noticed an invitee from the White House Office of Public Engagement Stephen Benjamin.  Here's what I found.  Benjamin served as Mayor of Charleston, South Carolina for over a decade and President of African American Mayors Association.

As a young lawyer Stephen Benjamin served on the board of Advance America Cash Advance Centers.

There he had the opportunity to learn about self dealing at the top.  Advance America had numerous entanglements with its Board Chairman.

This may be ancient history.  Private equity was in its relative infancy during this period.  Conflicted, self dealing became a signature mark of the greed and leverage boys.

More recently Mr. Benjamin served as Executive Chairman for Municipal Bonds for America.  They lobbied against taking away tax free muni's in 2016.

Some critics say the exclusion for municipal bond interest is an inefficient windfall for wealthy investors....

I'm sure the billionaire class was grateful.  

Politicians Red and Blue love PEU and increasingly, more are one.

PEU Damage in Oncology Care

I've learned much from perusing the comments submitted by the public regarding private equity's harmful ownership of healthcare companies.  Anonymous commented yesterday on the damage done in oncology services by private equity underwriters (PEU):

Private Equity in Healthcare is creating a barrier for patients to healthcare services. This has become apparent and problematic specifically in the Oncology sector.  

The cost to operate center requires a long-term commitment to be effective for patients and communities. There are few "new center" developments and builds in the US, so private equity must "acquire" practices and or physicians. The cost to do so for service lines like radiation oncology are prohibitive, so they enter into MSO or PSA contracts and collect a percentage with no real value added. The promise of investment and increased efficiencies to struggling service lines and physicians are often enticing, but these practices and their viability can't be controlled by private equity. 

 Recently, we saw what happens when this model fails with the bankruptcy of Genesis Care:  

Many of these facilities failed to reopen or be re-acquired due to location and the cost needed to make facility improvements. Private equity investment and involvement in oncology must be carefully looked at and reviewed. There is already disproportionate access in the US to cancer services. These short-lived models have the potential to restrict access to patients.

Private equity had two rounds with 21st Century Oncology/Genesis Care.  Vestar Capital owned the firm from 2008 to 2017 when it first declared bankruptcy.  21st Century Oncology paid Vestar over $1.2 million per year in management fees from 2012-2014 ($3.8 million total for the period).  

Deal and management fees paid to Vestar:

During 2010, we paid $2.0 million to Vestar Capital Partners V, L.P. for additional transaction advisory services in respect to the incremental amendments to our senior secured revolving credit facility, the additional $15.0 million of commitments to the revolver portion, and the complete refinancing of the senior subordinated notes. We paid approximately $0.6 million, $1.3 million and $1.3 million in management fees to Vestar for the years ended December 31, 2008, 2009 and 2010, respectively.

We paid approximately $1.6 million and $1.2 million in management fees to Vestar for the years ended December 31, 2011 and 2012, respectively.

We incurred approximately $1.3 million and $1.3 million in management fees to Vestar for the years ended December 31, 2013 and 2014, respectively.

And what did those $8.6 million in management fees buy?  Settlements with the Justice Department for fraudulent billing.

December 2015:

21st Century paid $19.75 million to settle allegations that it violated the False Claims Act by billing for medically unnecessary laboratory urine tests, and for encouraging physicians to order these tests by offering bonuses based in part on the number of tests the physicians referred to its laboratory.

March 2016:

21st Century Oncology, has agreed to settle allegations that they performed and billed for procedures that were not medically necessary. Pursuant to the settlement agreement, 21st Century shall pay the United States $34,695,243 to resolve these allegations. Headquartered in Fort Myers, 21st Century has offices in 16 states.

KKR backed GenesisCare bought 21st Century Oncology in 2019 after it emerged from bankruptcy.  KKR's ownership lasted until June 2023 when the firm declared bankruptcy.  

My wise friend sent me a story on venue shopping for bankruptcy cases and the rise of the Southern District of Texas as the preferred court for corporate financial resets.  SEC filings show twelve 21st Century Oncology firms, all based in Florida.  Of the firm's numerous subsidiaries, none were incorporated in Texas in 2016.  

So how does a PEU owned oncology firm in Florida declare bankruptcy in the Southern District of Texas?  Forum shopping.  The court wiped $1.5 billion off GenesisCare's balance sheet.  

Consider how long private equity underwriters were involved with this one cancer care company.  Seventeen years.  And the Feds are finally seeking public input on PEU ownership?

Yes, a number of things smell in this story.  The greed and leverage boys can stink up an industry.  It isn't called PEUReport for nothing...

Update 4-16-24:  Jesse's Cafe Americain quoted the damage done by those with hardened hearts.  It not only harms patients but impairs the careers of enterprising regulators wishing to constrain such bad behavior.  Truly odiferous!

Update 4-18-24:  Boring Business on X offered statistics on private equity in healthcare.  Private equity owned 20% of the healthcare firms that went bankrupt in 2023 and own 90% of those at risk for failure.

Update 4-22-24:  TPG and Amerisource Bergan purchased OneOncology from General Atlantic.  I have seen the damage TPG and Welsh, Carson, Anderson and Stowe majority ownership did to my hospice employer.  One FTC comment informed me of OneOncology's shift from one PEU to another.  My comment addressed damage done to hospice quality care. 

IntraFi's History Includes PEU Debt for Dividends

Semafor did an outstanding report on fintech company IntraFi.  

"How one company made bank off the regional banking crisis"

It raised a number of questions regarding IntraFi's private equity underwriter (PEU) ownership.  The story mentioned three founders.  All three served in the Clinton administration in various financial roles.  They joined together to start Promontory Financial Group and Promontory Interfinancial Network.  

PEUReport noted in 2009 former SEC Chair's advisory role with Promontory Financial Group.  Levitt still shows an association with "Promontory" on his X page along with a smattering of crypto/fintech firms.

The three founders signed a Promontory Interfinancial Network financial audit submitted to the SEC in 2005.   Promontory contacted the SEC again regarding proposed changes to money market regulations after the 2008 financial crisis.

The persons below played major roles under President Bill Clinton's White House.

A 2014 slide presentation detailed Promontory's service offering.

Through the magic of Promontory Interfinancial Network the $250,000 maximum per account is transformed to $50 million.  Former FDIC Chair Sheila Bair called Promontory's business model "gaming FDIC rules" in 2019.

That same year Blackstone bought the company.  It changed the name to IntraFi in 2020,  In 2021 Blackstone saddled IntraFi with $540 million in new debt for a sponsor dividend.

Blackstone sold part of IntraFi to Warburg Pincus in November 2021 and just months ago the pair loaded IntraFi will another $500 million in debt for yet another sponsor dividend.  

The Semafor backstory reveals the transformation of the Blue political team toward greed and leverage.  It's instructive given politicians Red and Blue love PEU and increasingly. more are one.

Update 4-12-24:  The American Prospect reported:

Lobbying reports released last week show $100,000 in expenses going in the first quarter of the year to The Duberstein Group, a well-connected lobbying firm that IntraFi has worked with in the past, in the Promontory years. The firm was founded by Ken Duberstein, a former White House chief of staff under Ronald Reagan who died last year.

The 2014 slide deck showed on Slide 19 that Ken Duberstein served as a Board member of Promontory Interfinancial Network.  Red Team Ken Duberstein did his part to advance PEU love after his public service.

Ares Capital Drops 99 Cents Store into Bankruptcy

The Sun U.S. reported:

Discount retailer 99 Cents Only filed for Chapter 11 bankruptcy in Delaware on Sunday after talks of closing. The company said it planned to close all of its 371 stores in the US and sell off its real estate and remaining inventory.

The move will result in the termination of over 10,000 employees.  The real estate will be sold off to satisfy creditors and store merchandise marked down under the handling of Hilco Global.

Private equity underwriter (PEU) Ares Capital purchased 99 Cent Stores in 2011 alongside a Canadian Pension fund.  Ares beat out an offer by Leonard Green Partners, another PEU.

As 99 Cent Stores is private no information is available on the amount of money Ares siphoned from their affiliate via, deal fees. annual management fees, special distributions or dividends.  Rest assured Ares recouped its initial equity investment long ago.

Hilco Global is part of Hilco Capital, which also has Canadian pension fund investment.  Hilco Global is itself a PEU affiliate:

Executive Vice-President and Head of Private Equity at CDPQ. “Hilco Global, whose role is to transition existing and often undervalued assets in challenged sectors into profitable use, directly benefits from the economic disruption taking place within companies around the world as a result of new technologies and changing consumer habits. Furthermore, this long term partnership is an excellent complement to CDPQ’s Distressed Debt strategy.”

The system has the greed and leverage boys on both sides of most deals.  They hold the equity and provide the credit.  Consider an IMF graphic put together and shared by Jack Farley via X. (I took the liberty of making slight adjustments).

The PEU boys are often on both sides of a buyout deal.  Even after getting multiples of their initial equity investment PEUs can buy discounted debt of affiliates they stressed as they travel the bumpy road to bankruptcy.  PEU sponsors often siphon valuable cash from the company during this process.

In our PEU oriented world conflicts remain secret.  There is no sheriff watching for unethical behavior.  The system is designed to their liking.  

Recall Ares beat out Leonard Green Partners for 99 Cent Stores in 2011.  Leonard Green bought JOANN in 2010 and bankrupted it last month.  LGP had taken JOANN public via an IPO in 2021.

Wolf Street wrote about JOANN's bankruptcy filing:

The company said today in an SEC filing that it had entered into a Transaction Support Agreement on March 15 with the holders of its senior secured term loan facility; and with the PE firms Green Equity Investors CF, L.P., Green Equity Investors Side CF, L.P., and LGP Associates CF, LLC; and with “certain current or former members of the Company’ board of directors”; and with “certain third-party financing parties that executed joinders thereto.”

And the means for LGP as a zeroed out equity holder to remain involved?  They likely bought discounted debt as JOANN circled the corporate drain.

I found it interesting that The Sun U.S. contacted 99 Cent Stores for comment but did not place a call to Ares Capital.  It's like interviewing the victim of the car wreck but not the perpetrator.  

One might expect elected officials to examine this unseemly financial landscape but that is not likely.  Politicians Red and Blue love PEU and increasingly, more are one.