Cramer Goes Off on Private Equity

| About: The Blackstone (BX)

I was going to write an entry on Blackstone (NYSE:BX) last week because they so represent the transfer of wealth that is happening in the USA, in return for such important economic contributions to the country- aka "financial gyrations." I did not get around to it, but after seeing Cramer's rant on Thursday I was "inspired". From their last earnings report, one number just blew me away

  • Blackstone reported losses of $113.2 million, or 44 cents per share. The loss included the impact of $802.6 million of non-cash charges for compensation and other items linked to its IPO.
So in layman's terms, we are issuing stock - selling to sucker investors, and pocketing nearly a billion. And the CEO is already a billionaire. As I mentioned a few months ago, when very shrewd guys are 'cashing out' into a mania you know its getting close to the top. If you remember this spring/summer we had private equity deal after private equity deal - one topping the other. Now, many of those deals - the private equity guys are just walking away from saying "business conditions" have changed. Amazing stuff.

After I read this Business Week article about the IPO of Burger King, my eyes were really opened how "finance" really works behind the scenes. I already knew about all the horror stories in other parts of the food chain (pardon the pun) but this private equity takes the cake. It's worth the read if you really want to know how money is made by 'the smart people in the room' - in a sentence, buy a company, lever it with tons of debt, take that money and pocket it for yourself and call it "management fees" that the company owes you for your expertise, and then re-sell the debt-laden company as a new IPO to the public. What a gig.
  • Nowadays private-equity firms often spend hundreds of millions of their own money on an acquisition (BW -- Feb. 27). Just as often, though, they load up the companies with debt and use the money to pay themselves special dividends and other fees that allow them to profit even if the company itself struggles. Then the backers take the company public, often pocketing the lion's share of the offering.
  • Then this past February, Burger King borrowed an additional $350 million so its owners could pay themselves and its two partners a special $367 million dividend.
  • In addition, Texas Pacific and the other investors are getting $30 million more to end a contract in which they received $9 million a year in management fees from Burger King.
  • Assuming the private-equity owners use part of the $600 million raised in the IPO to pay down the $350 million loan, that leaves as much as $250 million. Add that to the $367 million dividend and the $30 million kill fee, and their take totals $647 million, nearly double their original investment. It's all good for the owners, but Burger King ends up with $1 billion in long-term debt -- or more than double the relative debt loads carried by rivals like McDonald's, Wendy's, and Yum! Brands. That leaves Burger King in junk territory.
It's worth a full read if you want to know what is really going on behind the scenes. After reading that article I did a lot of other reading on similar deals and they all pretty much work the same way. So basically you (the investor) are funding these new era Gilded riches.

Anyhow, Cramer had a rant of all rants Thursday night on Private Equity. I can only assume either this has been building up for months after he heard about all the boy geniuses in private equity the past year or some specific event triggered him. But this has to be one of the most entertaining (and truthful) monologues I have ever heard - it is awesome to see an 'insider' go off like this. If you have 10 minutes I really recommend you watch this video - hilarious. Such classics as describing private equity leaders as so golden that they have "flatulence that smells like rose petals". Here is the Cramer link.

Boo Yah!

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