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Cash Flow is King

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  • KKR Financial Holdings: A Natural Replacement For Weakening mREIT Stocks [View article]
    Problem is the deterioration in ROE that will occur when the existing CLOs amortize and KFN effectively decreases its leverage. While CLOs are coming back, they provide much lower leverage (senior tranches have much higher credit support) and liabilities are much more expensive (spreads to LIBOR paid to investors are much higher albeit asset spreads are also higher). Newly minted CLOs are generating materially lower ROEs and are massively smaller in terms of size whereas fixed costs are the same. Ask any of the equity analysts that cover KFN what the ROE is on a newly minted CLO (using current collateral asset spreads and current liability credit spreads and leverage provided by the structure)....it is several hundred basis points lower than the historical CLOs. Also, making the outlook worse is the fact that credit spreads on new bank loan issuances have decreased faster than the cost of the CLO liability structure. If you do the math the ROE on newly minted CLOs, when including costs, is roughly 10% range. I speculate that the historic CLOs have ROEs in the 15-20% range. This isn't unique to KFN it impacts all of the BDCs and speciality finance companies that use CLOs to leverage their balance sheets.
    Nov 14 09:52 AM | 1 Like Like |Link to Comment
  • George Roberts will be manning a KKR booth at a Schwab sales event in Chicago next week as the once-swashbuckling P-E giant moves to become just another asset manager, launching two investment funds to be marketed to retail by Schwab. "It's all about fees and asset size now," says an industry lawyer, rather than growing carried interest - the 20% profit cut P-E firms earn when selling portfolio companies. [View news story]
    Do these mega PE firm business models work when you, on a pro forma basis, take the current cost structure and factor in the fact that the management fees and carried interest fees on new fund raises are collapsing at an alarming rate? Compare the management fees and carried interest (not to mention $ size) on the 2006 fund vs. the 2012 fund! Raising retail money (with $2,500.00 minimum account balances in the high yield fund and $25,000.00 in the distressed/special situations fund) seems like a real distraction (resources, management, etc.) or an ill advised way to maintain / grow headline AUM numbers.
    Nov 12 05:13 PM | Likes Like |Link to Comment
  • Seeing "real opportunity" in Spain's battered property and financial services sector, KKR co-founder Henry Kravis says his company is putting money to work there. Curiously, Kravis made the comments in Singapore, where his firm is opening a new office and aggressively raising money. Wilbur Ross previously[View news story]
    It will be a long, slow, crawl out of Spain's real estate primordial morass. But when your business model is to extract and lock-up OPM (other people's money) it is an appealing sound bite ("battered" intimating quick flip, high return, etc.) that just may make the uninformed, undisciplined investor write checks and lock up money in a 7 or 10 year lock-up fund notwithstanding the fact that the "opportunity" is by definition short term in nature (i.e., market dislocation consisting of an oversupply of real estate product, and disparate one-off portfolio sales of real estate and corporate credit because of bank capitalization issues).

    The question is do the mega private equity firms have the requisite boots on the ground local competitive informational advantage to take advantage of the opportunities in Spain (or Greece or Italy)....the fact is this appears to be significant "mission creep" and/or change in the purported core mandates for the mega private equity firms that have their core competencies rooted in corporate LBOs (albeit BX's real estate group can likely successfully execute on this opportunity, but they won't use a private equity fund rather their real estate funds). But as it relates to the other mega private equity business models ... caveat emptor. 
    Oct 25 10:47 AM | Likes Like |Link to Comment
  • "Full of malarkey," is Blackstone (BX +4%) President Tony James' description of the lawsuit against his firm, KKR, and others charging them with collusion. Referring to a friendly email between him and George Roberts, he says it's not just logical, but "a requirement" for the firms to work together on big deals. (earnings earlier) [View news story]
    Any decent lawyer who got a 19 or higher on their ACT (or the SEC, well ok you would need to handicap the SEC because they hire really bad people who can't get hired in the private sector) could get this sorted out in about 45 days....just go out and subponea 5 or 10 former senior employees (partners, MDs, etc.) at each of the big firms and shine the bright lights in their eyes....and they will puke out the truth faster than a frat boy or sorority girl during rush week. I speculate that at least 1/2 of the people who leave these firms despise the corrupt moral code of conduct that they had to adhere to while working at the firms (albeit they were paid lavishly and they know it). I speculate that during discovery these people would cherish the opportunity to tell the truth about the collusion on deals and the never ending violation(s) of the compliance "Chinese Walls" that, as these firms expand into every more products, has made it practically impossible to make any decision without putting a segment of investors in harms way but for the benefit of another class of investors in a different product line. Why? Because all of these firms are still really run by 2 to 5 guys who call all of the shots (across all product lines) and the rest of the people (including partners) don't go to the latrine until they are told when, where, and how. Chinese walls between product lines and no collusion amongst firms....bullshit...this is the only edge (sorry, competitive advantage) that these firms have.
    Oct 18 12:36 PM | 1 Like Like |Link to Comment
  • The Barbarians At The Gate Are Cheap And Providing A 5% Yield [View article]
    Run an XIRR to calculate the ** real realized, after tax yield **based on (x) your basis, (y) the dividend(s) that you receive, and (z) subtract the taxes you pay on the taxable income allocated to you on your K-1.

    Of course the scam is that you get allocated more taxable income via your K-1 then you receive in dividends. Then, to add injury to insult you are typically allocated some expenses on the K-1 that you can't deduct on your Form 1040 because of itemized deduction limits on your Form 1040! But, nobody has the discipline to actually think about what their ** after tax ** yield is (on a partnership structure the difference between pre-tax and after-tax is likely to be material).

    The end result is the drag on the headline pretax yield (dividend/price), adjusted of course for your actual taxes based on K-1 allocations, is material.

    But of course, 99% of all investors are lazy and/or bad at math and taxes and won't ever figure this out (or prefer to live in a state of denial).

    This is true for all the dopey partnership business models.
    Oct 1 09:29 AM | Likes Like |Link to Comment
  • Carlyle's (CG) David Rubenstein envisions a world where the retail investor can stand alongside institutions and wealthy individuals in putting money into LBO firms and other alternative investments. As P-E managers seek additional capital some are considering funds for the small guy, but one wonders how he will feel about locking up money for 10 years. [View news story]
    The slow deer (ala retail investor and dopey small institutional investsor) will pay 2/20 while the large, smart investors (at least those firms that are big, smart, and have balls) are all moving to SMAs (Separately Managed Accounts) and pay a flat fee of 35 to 45 bps with no carried interest. The historical 2/20 & 1.5/15 fee structures (which also by the way permitted transaction success fees) are going the way of the dinosaur and anyone investing real money in size is negotiating SMA fee "style" fee structures. Of course the equity analysts covering the public PE firms have not figured this out (yet) and of course the PE firms are not disclosing this fact in their 33' and 34' Act SEC filings (in fact if you listen to their earnings call or read the transcripts they intimate that the fees are "comparable" -- hey SEC why don't you verify those oral assertions that, of course, they won't put in a 33' or 34' Act filing). Of course, don't take my word for it, ask your equity analyst that covers Apollo or KKR what Texas Teachers is paying on their $3 Billion SMAs that were announced last fall....yikes....the truth hurts. All of the public PE firms trade on historical fee structures and AUMs .... that are based on fund raises and fee structures that no longer exist and won't exist in the future....yet investors and equity analysts refuse to spend 5 minutes to ponder / investigate the truth. Caveat Emptor.
    Oct 1 09:04 AM | Likes Like |Link to Comment
  • Sealy's (ZZ) second largest shareholder asks for a board seat and the resignation of KKR board rep Dean Nelson in a SEC filing. H Partners - which has a 14.5% stake in Sealy - also wants two more independent directors to be named after the company has seen 90% of its value lost since its 2006 IPO. [View news story]
    The PE firm's in-house consulting firms playbook is thin....like all PE firms...such firms (ala Capstone) take an elementary approach and take out the obvious fat and duplicative costs and implement best practices that graduates from a mediocre state college requiring a 19 ACT score could identify and execute. In terms of developing and tactically executing strategy that builds and enhances enterprise value -- well that takes vision and talent -- and even graduates from a bad state high school know that the interloper consultant that has ADD doesn't have that ability -- if they did they would running a firm vs. being paid like assistant treasurers while living in bad hotels 5 days a week (albeit they get to act like masters of the universe) while they carpet bomb portfolio companies with their thin playbook strategies while charging what appear to be non-arm's length fees paid of course by the shareholders. In this case, it gets even more piggish, in a classic wedge strategy -- the PE firm purportedly buys the majority of a convert transaction (collateral + option value) that will likely end up cramming down the minority shareholders who bought equity in the IPO (notwithstanding the fact that in the IPO the company was controlled by a firm that has multiple conflicts of interests). Of course, everyone assumes the board and management team (and if not the corporate governance and/or oversight bodies, as a safety net the SEC) would act in the best interests of all shareholders -- unfortunately neither the board members, management team, and/or regulators are. PE firms are the masters at selling debt with poor structure (e.g., no covenant protection) and poor risk/return profile to inept debt buyers...in this case the PE firm purportedly bought the majority of the convert ...not in the secondary market ... but in the new issue transaction market....that type of an investment is one that PE firms seldom make...unless of course, they are behind the scenes controlling the structure, pricing, and distribution in a non arm's-length transaction that by design created an attractive investment for the PE firm....of course at a cost borne by the shareholders.
    Mar 12 11:20 AM | Likes Like |Link to Comment
  • The steep fall in gas prices over recent years sparks doubts about the future of utility Energy Future Holdings, which was bought by a P-E group led by KKR (KKR), GS (GS) and TPG for $45B in 2007. Investors fear a sharp drop in revs due to the expiry over the next two years of hedges that protect the firm from the price falls, the FT reports.  [View news story]
    Now Buffet finally gets it....this transaction was not about building value via applying PE knowledge / expertise, rather it was a massively leveraged bet on the price of gas. With the initial hedges approaching expiry, absent an marked increase in gas prices, TXU will be the quintessential case study with respect to PE sponsor involvement in transactions that involves nothing more than a directional bet on a commodity. In this transaction, the PE sponsor's hyperbole with respect to the "hedges" was either negligence (given the short tenor of the hedges relative to long dated risk) or PE sponsor marketing at is finest. Shame on debt investors who don't get compensated for taking this type of risk; conversely, kudos to the PE sponsors for bamboozling/bullying the rating agencies and debt investors. Bravo! Memories are short, in the last 30 days we have seen a rush of similar commodity bets being placed by PE sponsors who are rushing to put their dated PE fund dry powder to work before the investment expiry date of such funds.
    Mar 7 08:41 AM | 1 Like Like |Link to Comment
  • Ally Financial CEO Michael Carpenter sits down with the WSJ, and talks about repaying $17B to taxpayers, the company's partnership with GM, and what it's like to have the Treasury as a major shareholder. (Not discussed: the company's expected IPO)  [View news story]
    such dead money, no reason to exist
    Feb 9 03:24 PM | Likes Like |Link to Comment
  • JPMorgan Chase (JPM) asks the bankruptcy judge overseeing the proceedings in the Bernie Madoff case to move Irving Picard's lawsuit to federal district court where it can demand a jury trial. A court filing says the trustee for Madoff's victims is exceeding his power by suing in bankruptcy court where a judge rather than a jury would decide the case.  [View news story]
    Any competent judge is going to laser in on the fact that at the top of the house, Dimon was net short Madoff exposure (short vis-a-vis their paying on Madoff linked TROR swaps while their long position was substantially eliminated by redeeming their investments in the Madoff funds)....that net short position is either (i) imprudent business decision and/or risk management decision (if they believed in Madoff's track record and ability to generate the said returns) or (ii) prima facie evidence that they had an implicit top of the house bet that Madoff was a ponzi scheme. If their lawyers are semi competent, their TROR swaps had disclosure that stated they could be net long, neutral, and/or net short Madoff exposure, but I speculate they were sold with the standard BS line "...we want to reduce our long exposure...". A jury won't be able to parse through what it means (with respect to knowledge of Madoff) to have the net short position at the top of the house. dimon has instilled a culture that every business line in the bank talks to each other about what the hell is going on with customers and their net exposure to each company and how to use customer-centric information (even when sharing such information across business lines raises ethical and other issues) to effectively manage the bank's net economic exposure and / or to make money on the information flow. Of course I am just speculating here, but if it walks like a duck...
    Feb 9 03:19 PM | 1 Like Like |Link to Comment
  • Wells Fargo (WFC) announces that CFO Howard Atkins is retiring immediately due to "personal reasons" and will be replaced by chief administrative officer Timothy Sloan. The bank says the move is "unrelated to the company's financial condition or financial reporting." WFC -2.6% AH. (PR)  [View news story]
    because the public relations group decided to include the gratuitous comment "...on unpaid leave....until retirement..." causes me to conclude it was personal conduct (ala Hurd) matter and the board was miffed....otherwise the public relations group would have been told to use language that was more favorable for Atkins. Sloan is damn smart, thinks straight and talks straight, and has pristine reputation...he will do good work...he is a natural successor to Stump in 5 to 7 years.
    Feb 8 06:47 PM | 2 Likes Like |Link to Comment
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