Monday, April 30, 2012

Third Bad News for Carlyle IPO: China Forestry

With a looming IPO the last thing The Carlyle Group needs is more bad news.  Yet, that's the story from affiliate China Forestry.  Bloomberg's headline stated:

China Forestry Probe Verifies Under 1% of Reported Sales 

The piece went on to say:

China Forestry Holdings Co. (930), the logging company that last week said its only able to account for 1 percent of its historical sales, still has value in its assets, according to its third-largest holder, Carlyle Group

This is but the latest bad news for China Forestry.  Even in "recovery" the company can't win for losing:

Acting (China Forestry) Chief Executive Officer Li Jian resigned April 15, after the company’s net loss widened in 2011 as it struggled to rebuild its management and business relationships, according to separate filings on April 27. China Forestry hired Crowe Horwath HK CPA Ltd. as its auditor in January replacing KPMG LLC which resigned, saying the company needs to verify ownership and valuation of assets. 
China Forestry's sins include overstating the area of forestry rights by 150%::

The area covered by forestry rights certificates reviewed by investigators represents about 41 percent of the area the company said it owned the rights to in its 2010 annual report. 
It's financial statements aren't verifiable.

Financial statements for the years from 2006 through 2009 aren’t verifiable because the independent board committee conducting the probe found that some of the underlying supporting information isn’t available, the company said on April 27, detailing findings from the investigation.  

Carlyle invested in China Forestry in January 2008.  What kind of due diligence did they do?  Did they find the double books in one China Forestry subsidiary?

Would Carlyle judge this puffery, their defense in a former investor lawsuit?

Huffington Deals Carlyle IPO Blow

Former Congressman Michael Huffington's payback for The Carlyle Group's losing his $20 million investment continued today.  His press release stated:

Claims for unfair and deceptive acts and practices leveled against the Carlyle Group, David Rubinstein, one of the Carlyle Group's founders, T.C. Group, LLC and Carlyle Investment Management LLC, by former Congressman Michael Huffington will be heard by a jury following a ruling by a Delaware Superior Court.

The Court further stated that "it is for the jury to decide whether Defendants engaged in an 'unfair or deceptive act or practice' by (allegedly) failing to tell [Huffington] about the use or extent of leverage" and the jury must also decide whether the overleveraging of the Fund constitutes an unfair or deceptive act or practice under the applicable law. 

If Huffington is successful in his claims, the law allows him to seek up to three times his damages as well as his attorneys' fees. 

How much might this bad publicity will cost Carlyle in its IPO?  If proceeds are more than $20 million below Carlyle's expected discount pricing, Rubenstein et al may wish they'd settled.

Sunday, April 29, 2012

AlpInvest London Chief Exits Carlyle Prior to IPO

The Carlyle Group acquired AlpInvest in 2011.  It was cited as one "Deal of the Year" by Private Equity International.  When Carlyle announced the deal, Co-founder David Rubenstein stated:

We have the highest regard for (AlpInvest CEO) Volkert (Doeksen) and his investment team.
That team is lighter today, given two reports.  Dow Jones stated::

Europe’s largest private equity investor, AlpInvest Partners, no longer operates a London office and has closed its primary mezzanine investment arm in the first major developments since its spin-out backed by US alternatives firm Carlyle Group.
Financial News reported:

AlpInvest Partners, Europe’s largest private equity investor, now part of US alternatives firm Carlyle Group, has closed its London office, pulled out of primary mezzanine debt and seen the departure of London chief Erik Bosman. 

If Erik's parting had any acrimony, he may wish to call Brintons' founding family.  They have a score to settle with Carlyle and company.

As for AlpInvest, they may wish to update their website:

That's one picture to eliminate and a graphic to adapt, all courtesy of The Carlyle Group pre-IPO.

Saturday, April 28, 2012

Carlyle's Gemcom Exit

The Carlyle Group will liquefy their stake in Gemcom, a mining software company.  .Carlyle was part of a consortium that took Gemcom private in June 2008. as PEU "Deal Frenzy" stood near collapse.  Carlyle and partners purchased Gemcom in a deal valued at $190 million.  They're monetizing for a near double under a $360 million deal.

Carlyle is normally silent on proceeds from private sales.  Why share what appears to be a $170 million profit now?  It's IPO time!

I wonder how Brooke and Garth made out on the deal...

Milken the Globe

The Milken Institute Global Conference starts this weekend in the City of Angels.  I perused the Financial Track for politicians and private equity underwriters (PEU's).

I threw in Apollo Global's Senator Evan Bayh as a bonus track.  PEU positions are occupied by many former politicians and public servants.

Last year Maria refereed a Snark Fest.  I guess that's what happens when five billionaires occupy the same stage, each with a new investment offering to push. 

Carlyle Group co-founder David Rubenstein won't make the public dais at this year's Power PEU Platform  Rubenstein and his fellow co-founders are on a different global mission, hawking The Carlyle Group's IPO.  While Rubenstein can't make it, his wife will:

Giving a special address to Milken Globalists is President and PEU Bill Clinton.

His Clinton Global Initiative uses "a business-oriented approach worldwide" to solve pressing problems.  Clinton privatized the government security clearance function, which later enriched David Rubenstein.  Get the picture?

It's "Milkin' the Globe" time on at least two tracks.

Update 5-1-12:  Dealbook reported on the PEU session.

Friday, April 27, 2012

Will KKR's Lower Distributable Earnings Hurt Carlyle IPO?

KKR's distributable earnings drop came at a bad time for The Carlyle Group as it will price its IPO this coming week. Reuters reported:

KKR & Co LP said Friday that income from its share of investors' profits and the fees it charges for its assets slumped in the first quarter, prompting the private equity firm to cut its dividend.

KKR, whose investments include retailer Toys R US Inc, Internet domain registration company Go Daddy Group Inc and hospital operator HCA Holdings Inc, said first-quarter gross distributable earnings, which are used to pay dividends, fell 42 percent from a year ago, to $111.5 million.

Carlyle's DBD co-founders are in the midst of a global IPO sales blitz.  David Rubenstein says Carlyle is priced at a discount and ready to go up post offering.  Private equity firms are known for their earnings volatility and thus far in Q1 Blackstone and KKR have lower earnings.

A year ago Apollo Global Management went public at $19 a share  It's down to $13.11, a 31% drop .  Oaktree Capital priced weeks ago at $43.  It's down to $39.80, a 7.4% fall.  KKR's HCA priced at $30 and it closed today at $27.23, a decline of 9.2%.

The Carlyle Group believes it can beat this pattern.  Beware the PEU plague.

Thursday, April 26, 2012

PEU Correspondents Weekend

Who says playfulness, pleasantry, politics, and PEU's (private equity underwriters) don't mix?  The tomfoolery continues this weekend.


18th Annual White House Correspondents' Garden Brunch.  This brunch -- a.k.a. "Tammy's Brunch" -- is an annual tradition that used to take place at the residence of Veteran TV Producer Tammy Haddad and her husband, World Bank Attorney Ted Greenberg. This year, it's switching to the former residence of (former Queen of WaPo) Katharine Graham, which is now owned by (Media PEU) Mark Ein. Honorary event co-chairs are Wendi Murdoch (filmmaker and maternal health advocate) and Epilepsy Activist Susan Axelrod (the duo will be on hand to bring awareness for The White Ribbon Alliance for Safe Motherhood and CURE, an epilepsy research organization). Kick off is 11 a.m.

Location: The Beall-Washington House - 2920 R St., N.W., Washington, D.C. 20007 [map]

The guest list includes Twitter founder Evan Williams, Google's Eric Schmidt, Olympian Shaun White, The Carlyle Group founder David Rubenstein, Majority Leader Eric Cantor (R-Va.), White House Senior Advisor Valerie Jarrett, "Dancing With The Stars" Co-Host Brooke Burke, White House Chief of Staff Bill Daley and "Modern Family" Stars Jesse Tyler Ferguson and Eric Stonestreet.

There will be a press line and red carpet arrivals. In addition to the media frenzy, guests will enjoy scrumptious treats from The Georgetown Cupcake sisters (stars of TLC's "DC Cupcakes").
If we can't have profundity, PEU-ffoonery will have to do.

Wednesday, April 25, 2012

Carlyle IPO Marketing Blitz Midpoint

Reuters reported

In an unusual move, the private equity firm brought out all three of its founders to a road show in New York to tout its IPO, one of the largest this year besides social media network Facebook's debut expected in May.
Carlyle (DBD) founders Daniel D'Aniello, William (Bill) Conway and David Rubenstein were joined at the event at the landmark Plaza Hotel by COO Glenn Youngkin and CFO Adena Friedman, as well as the firm's top dealmakers, in a major U.S. effort by the private equity firm during its 2-week global marketing blitz.
Unusual move? The DBD's ventured into comedy to sell Carlyle units. They plan to monetize, liquefy, have a huge profitgasm by selling their PEU stake.Therefore they need the IPO to go well and are pulling all the stops. 

Besides the founders, Carlyle also brought in a celebrity guest, JPMorgan Chase & Co Vice Chairman Jimmy Lee, to sing the praises of its IPO.

Lee, who made his name arranging loans to buyout firms as they became major powers on Wall Street, told a crowd of more than 150 investors, analysts and bankers that Carlyle's best days are yet to come, people who attended the meeting said.

JP Morgan is one of three lead underwriters, so Lee isn't conflict free.  When Carlyle affiliate SemGroup soured, stockholders sued Carlyle.  Carlyle's defense?  Puffery, i.e. sales talk should not be believed.  A true test of character is how one behaves when stressed.  Puffery then.  Puffery now?

Carlyle's Cayman Cash-In

MarketWatch ran a press release which stated:

Boston Private Financial Holdings announced in the first quarter of 2012 that it had repurchased all of the 5.44 million warrants held by affiliates of The Carlyle Group, and BPFH Director John Morton III. The Company repurchased the warrants for a total cash consideration of $15.0 million. 

SEC filings detailed "affiliates of The Carlyle Group."

DBD Cayman, Ltd. is the general partner of TCG Holdings Cayman II, L.P., which is the general partner of TC Group Cayman Investment Holdings, L.P., which is the sole shareholder of Carlyle Financial Services, Ltd., which is the general partner of TCG Financial Services L.P., which is the general partner of BP Holdco, L.P. Accordingly, each of DBD Cayman, Ltd., TCG Holdings Cayman II, L.P., TC Group Cayman Investment Holdings, L.P., Carlyle Financial Services, Ltd. and TCG Financial Services L.P. may be deemed to be a beneficial owner of shares of Common Stock owned by BP Holdco, L.P. On February 28, 2012, the Company repurchased for cash all of the warrants held by BP Holdco and John Morton. The Company (i) repurchased warrants held by BP Holdco, representing the right (subject to the exercise and other limitations therein) to purchase 5,383,891 shares of Common Stock for $14,836,928.28, (ii) repurchased warrants held by Mr. Morton, representing the right (subject to the exercise and other limitations therein) to purchase 59,174 shares of common stock, for $28,155.00 and (iii) made a cash payment of $134,916.72 to BP Holdco in respect of a cash payment that would have been payable to BP Holdco upon exercise of the warrants held by Mr. Morton.

That's another Carlyle $14,8 million payday.  Will any IPO unit holders participate?  DBDoubtful.

Tuesday, April 24, 2012

Carlyle Group's Digital Patriot

Politico reported:

CES on the Hill, produced by the Consumer Electronics Association, hosts members of Congress, Hill staff and media to showcase and demonstrate the top policy issues and challenges affecting the CE industry. CEA holds its annual Digital Patriots dinner at the Newseum, this year honoring Sen. Ron Wyden, Rep. Jason Chaffetz, and Carlyle Group Managing Director David Rubenstein
Thanks to Carlyle's Rubenstein and affiliate ARINC, executives can get e-mail on their private jets.  In the Government-Corporate Monstrosity (Eisenhower's Military-Industrial Complex on trillions in federal steroids), that makes one a Digital Patriot.

Rainmaker Rubenstein is also a great draw for Congressmen and women.

A look at Carlyle employees political donations this election cycle shows plenty of Red and Blue, male and female.  Rest assured, Carlyle can turn political leverage into PEU profits.  How can Carlyle affiliates take advantage of CIPSA?  What role might Booz Allen Hamilton play in a CIPSA rollout?

Update 5-16-12:  President Obama publicly bashed PEU's while privately attending fundraisers at PEU homes. I've long said Red and Blue love PEU's.

Monday, April 23, 2012

Carlyle Names Doty OE

The Carlyle Group's press release stated:

Global alternative asset manager The Carlyle Group today announced that Elmer L. Doty, former President and Chief Executive Officer of Vought Aircraft Industries, Inc., has joined the firm as an Operating Executive for the Aerospace and Defense team.
The release failed to mention how Vought stiffed Texas taxpayers of $35 million under Carlyle and Doty.  Vought promised 3,000 new jobs by 2010.  After holding $35 million for six years, Carlyle/Vought eliminated 35 positions.  Governor Rick Perry gave Vought $1 million per Texas job lost.

Vought gunked up Boeing 787 Dreamliner production under Doty.  Vought's CEO blamed it on a liquidity problem.  And I thought that was Carlyle's expertise.

In 2007 Doty told the Dallas Business Journal:

To his disappointment, Doty added in an April 17 interview with the Dallas Business Journal, expanding in Dallas is unlikely, as are plans to buy the old Naval Air Station from the U.S. Navy. So a $35 million cash grant in 2004 from Gov. Rick Perry's Texas Enterprise Fund most likely will be repaid

A morsel was repaid before Perry rode to the rescue, renegotiating Vought's deal in time for Carlyle to sell Vought to Triumph.  Earlier Boeing bought out two Vought associated Dreamliner production sites. 

None of that made Carlyle's press release or Governor Rick Perry's aspiring Presidential run.  Perry suspended his campaign.   Doty kicked off a new one with his effusive praise for Carlyle:

I have come to know Carlyle as a firm that clearly knows how to leverage its deep industry expertise to create value not just for its investors, but also for the customers and employees of the businesses that the firm invests in.”

Investors come first.  Spoken like a PEU operator.

Sunday, April 22, 2012

Search for Positive PEU Contributions Doesn't Slow Lerner

Harvard Business School Professor Josh Lerner is head of the Private Capital Research Institute Pension & Investments reported on a fledgling private equity underwriter (PEU) database.  The philosophy is "build it and they will come."

Officials at non-profit The Private Capital Research Institute are hoping a starter set of 15 well-known private equity firms contributing to a research database is enough to get more general partners to participate.

The stater set is ample in size and scope:

The initial contributors are Actis; Apax Partners; Apollo Global Management LLC; Berkshire Partners LLC; The Carlyle Group; Court Square Capital Partners; Clayton, Dubilier & Rice LLC; First Reserve Corp.; General Atlantic LLC; KKR & Co. LP; Kohlberg & Co. LLC; New Mountain Capital LLC; The Riverside Co.; Saybrook Corporate Opportunity Fund LP; and Thomas H. Lee Partners

Apollo, Bershire, Carlyle, KKR, Clayton Dubilier and Thomas H. Lee Partners should be able provide data on thousands of PEU transactions.  I expect they plan to pick and choose, submitting data on "winners" under Josh's criteria.  If PEU's can game the political system, they have the wherewithal to distort academic research.

As for Josh Lerner, one doesn't have to look far to find his love for PEU's.  Yet his new nonprofit claims to have no particular "point of view."

The Private Capital Research Institute (PCRI) led by Harvard Business School Professor Josh Lerner, is seeking to address these disparities in knowledge by examining private capital transactions and institutions, seeking to understand their fundamental economic nature and impact. The PCRI is a not-for-profit corporation, to date solely funded by the Erwin Marion Kauffman Foundation; the Brookings-PCRI Private Capital Project has a number of generous donors, including the Association of Corporate Growth. The research is independent and focused on promoting an understanding of the Private Capital Industry, rather than advancing a particular point of view.

Of course Lerner has a point of view.  It's pro-PEU.  Otherwise why would he get invited to speak at meetings of global economic tamperers this past decade. Take this talk from 2008:

Josh Lerner recently led an international team of scholars in a study of the economic impact of private equity for the World Economic Forum (WEF).
Josh knows how PEU money drives the WEF.  Lerner co-heads the Brookings Private Capital Project.  It's aim?  Research positive contributions of the industry.  That means only putting their good stories in the database.  That's why fifteen PEU's with thousands of companies isn't nearly enough.

How might Josh Lerner's "research" shift the private equity frame in the Presidential campaign, now that Bain's Romney has a lock on the Republican nomination?  It remains to be seen, but In the end, both Red and Blue love PEU.

Update 6-3-14:  NakedCapitalism noted similar characteristics of PEU return studies as PEUReport:   "Most studies have relied on cherry-picked data sets supplied by the private equity general partners. And even more rich, who has performed these studies? Almost without exception, finance professors who are members of business school faculties. Who are the biggest funders of business school endowments? At many schools, private equity firms. In other words, taking a critical stance towards the industry would not be a career-advancing move for a budding young scholar."

Saturday, April 21, 2012

Carlyle Group's Lawsuits

Washington, D.C. 20549

Amendment No. 7
Form S-1

The Carlyle Group L.P.
(Exact name of Registrant as specified in its charter)
From time to time we are involved in various legal proceedings, lawsuits and claims incidental to the conduct of our business. Our businesses are also subject to extensive regulation, which may result in regulatory proceedings against us.
In September 2006 and March 2009, we received requests for certain documents and other information from the Antitrust Division of the DOJ in connection with the DOJ’s investigation of alternative asset management firms to determine whether they have engaged in conduct prohibited by U.S. antitrust laws. We have fully cooperated with the DOJ’s investigation. There can be no


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assurance as to the direction this inquiry may take in the future or whether it will have an adverse impact on the private equity industry in some unforeseen way.
On February 14, 2008, a private class-action lawsuit challenging “club” bids and other alleged anti-competitive business practices was filed in the U.S. District Court for the District of Massachusetts. (Police and Fire Retirement System of the City of Detroit v. Apollo Global Management, LLC). The complaint alleges, among other things, that certain alternative asset management firms, including Carlyle, violated Section 1 of the Sherman Act by, among other things, forming multi-sponsor consortiums for the purpose of bidding collectively in certain going private transactions, which the plaintiffs allege constitutes a “conspiracy in restraint of trade.” The plaintiffs seek damages as provided for in Section 4 of the Clayton Act and an injunction against such conduct in restraint of trade in the future. While Carlyle believes the lawsuit is without merit and is contesting it vigorously, it is difficult to determine what impact, if any, this litigation (and any future related litigation), together with any increased governmental scrutiny or regulatory initiatives, will have on the private equity industry generally or on Carlyle.
Along with many other companies and individuals in the financial sector, Carlyle and one of our funds, CMP I, are named as defendants in Foy v. Austin Capital, a case filed in June 2009, pending in the State of New Mexico’s First Judicial District Court, County of Santa Fe, which purports to be a qui tam suit on behalf of the State of New Mexico. The suit alleges that investment decisions by New Mexico public investment funds were improperly influenced by campaign contributions and payments to politically connected placement agents. The plaintiffs seek, among other things, actual damages, actual damages for lost income, rescission of the investment transactions described in the complaint and disgorgement of all fees received. In May 2011, the Attorney General of New Mexico moved to dismiss certain defendants including Carlyle and CMP I on the ground that separate civil litigation by the Attorney General is a more effective means to seek recovery for the State from these defendants. The Attorney General has brought two civil actions against certain of those defendants, not including the Carlyle defendants. The Attorney General has stated that its investigation is continuing and it may bring additional civil actions. We are currently unable to anticipate when the litigation will conclude, or what impact the litigation may have on us.
In July 2009, a former shareholder of Carlyle Capital Corporation Limited (“CCC”), claiming to have lost $20.0 million, filed a claim against CCC, Carlyle and certain of our affiliates and one of our officers (Huffington v. TC Group L.L.C. et al.) alleging violations of Massachusetts “blue sky” law provisions and related claims involving material misrepresentations and omissions allegedly made during and after the marketing of CCC. The plaintiff seeks treble damages, interest, expenses and attorney’s fees and to have the subscription agreement deemed null and void and a full refund of the investment. In March 2010, the United States District Court for the District of Massachusetts dismissed the plaintiff’s complaint on the grounds that it should have been filed in Delaware instead of Massachusetts, and the plaintiff subsequently filed a notice of appeal to the United States Court of Appeals for the First Circuit. The plaintiff has lost his appeal to the First Circuit and has filed a new claim in Delaware state court. Defendants are awaiting a ruling on a motion for summary judgment. The defendants are vigorously contesting all claims asserted by the plaintiff.
In November 2009, another CCC investor instituted legal proceedings on similar grounds in Kuwait’s Court of First Instance (National Industries Group v. Carlyle Group) seeking to recover losses incurred in connection with an investment in CCC. In July 2011, the Delaware Court of Chancery issued a decision restraining the plaintiff from proceeding in Kuwait against either Carlyle Investment Management L.L.C. or TC Group, L.L.C., based on the forum selection clause in the plaintiff’s subscription agreement, which provided for exclusive jurisdiction in Delaware courts. In September 2011, the plaintiff reissued its complaint in Kuwait naming CCC only, but, in December 2011, expressed an intent to reissue its complaint joining Carlyle Investment Management L.L.C. as a defendant. We believe these claims are without merit and intend to vigorously contest all such allegations.
The Guernsey liquidators who took control of CCC in March 2008 filed four suits in July 2010 against Carlyle, certain of its affiliates and the former directors of CCC in the Delaware Chancery Court,


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the Royal Court of Guernsey, the Superior Court of the District of Columbia and the Supreme Court of New York, New York County, (Carlyle Capital Corporation Limited v. Conway et al.) seeking $1.0 billion in damages. They allege that Carlyle and the CCC board of directors were negligent, grossly negligent or willfully mismanaged the CCC investment program and breached certain fiduciary duties allegedly owed to CCC and its shareholders. The Liquidators further allege (among other things) that the directors and Carlyle put the interests of Carlyle ahead of the interests of CCC and its shareholders and gave priority to preserving and enhancing Carlyle’s reputation and its “brand” over the best interests of CCC. The defendants filed a comprehensive motion to dismiss in Delaware in October 2010. In December 2010, the Liquidators dismissed the complaint in Delaware voluntarily and without prejudice and expressed an intent to proceed against the defendants in Guernsey. Carlyle filed an action in Delaware seeking an injunction against the Liquidators to preclude them from proceeding in Guernsey in violation of a Delaware exclusive jurisdiction clause contained in the investment management agreement. In July 2011, the Royal Court of Guernsey held that the case should be litigated in Delaware pursuant to the exclusive jurisdiction clause. That ruling was appealed by the Liquidators, and in February 2012 was reversed by the Guernsey Court of Appeal, which held that the case should proceed in Guernsey. Carlyle intends to seek review of that ruling pursuant to an application for special leave to the Privy Council. Carlyle will also request a stay of further proceedings, pending consideration of the appeal application, from the Privy Council. Also, in October 2011, the plaintiffs obtained an ex parte anti-anti-suit injunction in Guernsey against Carlyle’s anti-suit claim in Delaware. That ruling has been affirmed by the Guernsey Court of Appeal, although a written judgment has not yet been released. Carlyle anticipates that it will seek a further appeal before the Privy Council on the anti-anti-suit injunction order. The Liquidators’ lawsuits in New York and the District of Columbia were dismissed in December 2011 without prejudice. We believe that regardless of where the claims are litigated they are without merit and we will vigorously contest all allegations. We recognized a loss of $152.3 million in 2008 in connection with the winding up of CCC.
In June 2011, August 2011, and September 2011, three putative shareholder class actions were filed against Carlyle, certain of our affiliates and former directors of CCC alleging that the fund offering materials and various public disclosures were materially misleading or omitted material information. Two of the shareholder class actions, (Phelps v. Stomber, et al.) and (Glaubach v. Carlyle Capital Corporation Limited, et al.), were filed in the United States District Court for the District of Columbia. The most recent shareholder class action (Phelps v. Stomber, et al.) was filed in the Supreme Court of New York, New York County and has subsequently been removed to the United States District Court for the Southern District of New York. The two original D.C. cases were consolidated into one case, under the caption of Phelps v. Stomber, and the Phelps named plaintiffs have been designated “lead plaintiffs” by the Court. The New York case has been transferred to the D.C. federal court and the plaintiffs have requested that it be consolidated with the other two D.C. actions. The defendants have opposed and have moved to dismiss the case as duplicative. The plaintiffs in all three cases seek all compensatory damages sustained as a result of the alleged misrepresentations, costs and expenses, as well as reasonable attorney fees. The defendants have filed a comprehensive motion to dismiss. We believe the claims are without merit and will vigorously contest all claims.
From 2007 to 2009, a Luxembourg portfolio company owned by Carlyle Europe Real Estate Partners, L.P. (CEREP I) received proceeds from the sale of real estate located in Paris, France. CEREP I is a real estate fund not consolidated by us. The relevant French tax authorities have asserted that such portfolio company had a permanent establishment in France, and have issued a tax assessment seeking to collect €97.0 million, consisting of taxes, interest and penalties. We understand that the matter has been referred to the French Ministry of Justice, which may appoint a prosecutor to conduct an investigation.
During 2006, CEREP I completed a reorganization of several Italian portfolio companies. Such Italian portfolio companies subsequently completed the sale of various properties located in Italy. The Italian tax authorities have issued revised income tax audit reports to various subsidiaries of CEREP I. The tax audit reports proposed to disallow deductions of certain capital losses claimed with respect to the reorganization of the Italian portfolio companies. As a result of the disallowance


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of such deductions, the audit reports proposed to increase the aggregate amount of Italian income tax and penalties owed by subsidiaries of CEREP I by approximately €50.0 million. It is possible that the Italian Ministry of Justice could appoint a prosecutor to conduct an investigation.
CEREP I and its subsidiaries and portfolio companies are contesting the French tax assessment and also intend to contest the proposed Italian income tax adjustments. Settlement opportunities are also being explored. Although neither CEREP I nor the relevant portfolio companies is consolidated by us, we may determine to advance amounts to such nonconsolidated entities or otherwise incur costs to resolve such matters, in which case we would seek to recover such advance from proceeds of subsequent portfolio dispositions by CEREP I. The amount of any unrecoverable costs that may be incurred by us is not estimable at this time.

Thursday, April 19, 2012

Carlyle Group PU - Partnership Units

SEC filings show current ownership stakes in Carlyle Holdings. Carlyle co-founders hold over 50% of the partnership units. That will decline to 45% when The Carlyle Group completes its IPO.

For those confused about the difference between partnership units and common units:

Subject to certain requirements and restrictions, the partnership units of Carlyle Holdings are exchangeable for common units of The Carlyle Group L.P. on a one-for-one basis, from and after the first anniversary date of the closing of this offering (subject to the terms of the exchange agreement). See “Certain Relationships and Related Person Transactions — Exchange Agreement.” Beneficial ownership of Carlyle Holdings partnership units reflected in this table is presented separately from the beneficial ownership of the common units of The Carlyle Group L.P. for which such partnership units may be exchanged.
But it's not really a level playing field between partnership and common unit holders:

We will reimburse our general partner and its affiliates for all costs incurred in managing and operating us, and our partnership agreement provides that our general partner will determine the expenses that are allocable to us.
The general partner will determine.

We will reimburse our general partner and its affiliates for expenses.
We will reimburse our general partner and its affiliates for all costs incurred in managing and operating us, and our partnership agreement provides that our general partner will determine the expenses that are allocable to us.

Our general partner intends to limit its liability regarding our obligations.
Our general partner intends to limit its liability under contractual arrangements so that the other party has recourse only to our assets, and not against our general partner, its assets or its owners. Our partnership agreement provides that any action taken by our general partner to limit its liability or our liability is not a breach of our general partner’s fiduciary duties, even if we could have obtained more favorable terms without the limitation on liability. The limitation on our general partner’s liability does not constitute a waiver of compliance with U.S. federal securities laws that would be void under Section 14 of the Securities Act.

Our common unitholders will have no right to enforce obligations of our general partner and its affiliates under agreements with us.
Any agreements between us on the one hand, and our general partner and its affiliates on the other, will not grant to the common unitholders, separate and apart from us, the right to enforce the obligations of our general partner and its affiliates in our favor.

Contracts between us, on the one hand, and our general partner and its affiliates, on the other, will not be the result of arm’s-length negotiations.
Our partnership agreement allows our general partner to determine in its sole discretion any amounts to reimburse itself or its affiliates for any costs or expenses incurred in connection with our activities. Our general partner may also enter into additional contractual arrangements with any of its affiliates on our behalf. Neither the partnership agreement nor any of the other agreements, contracts and arrangements between us on the one hand, and our general partner and its affiliates on the other, are or will be the result of arm’s-length negotiations. Our general partner will determine the terms of any of these transactions entered into after this offering on terms that it agrees to in good faith as determined under our partnership agreement. Our general partner and its affiliates will have no obligation to permit us to use any facilities or assets of our general partner and its affiliates, except as may be provided in contracts entered into specifically dealing with that use. There will not be any obligation of our general partner and its affiliates to enter into any contracts of this kind.

Our common units are subject to our general partner’s limited call right.

Wow, an opportunity for servitude and dilution. How many serfs will line up to become Carlyle Common Unit Holders, especially in light of Blackstone's underwhelming first quarter and nearly 5% stock price drop?

Update 4-20-12:  Will WaPo's Donald Graham get a commission for his paper's role in pushing Carlyle's IPO?

Wednesday, April 18, 2012

PEU Lessons from Rahm's Illinois

Illinois state and local institutions have enriched private equity underwriters (PEU's).  The Chicago Sun-Times reported:

The Teachers Retirement System (TRS) of Illinois--which represents thousands of school employees, is financially strapped and concerned about its long-term viability--paid more than $1.3 billion for money managers and brokerage firms to handle its $30 billion-plus in financial assets during a 10-year period ending in fiscal 2010. 
Despite paying big money for high-powered investment expertise, TRS’ 10-year average rate of return during this span was a mere 3.7 percent excluding the cost of fees, far below its 8.5 percent annual target return. 

Including fees, the pension’s return during that period was 3.3 percent, according to TRS, which which is just below the median of 3.4% for public pensions during that period.
The Carlyle Group stood out as the most invested PEU.

Private equity firm Carlyle was by far the largest vendor for TRS during that 10-year period, according to figures TRS provided the BGA. TRS invested in 11 of that firm’s funds, paying Carlyle more than $71 million. In 2010, TRS recorded declines for five of the Carlyle funds in which the pension invested.

What Illinois politician received Carlyle's backing,sitting at #16 on his donor list for the 2008 campaign? It was Congressman Rahm Emanuel.

What did Carlyle get for their Rahm investment in the 2008 campaign?  Nary a vote.

Carlyle got a White House Chief of Staff and now Chicago Mayor, intent on giving private investors a chance to win big on public infrastructure.

Emanuel's predecessor rushed through parking privatization that turned out to be a supremely bad deal for citizens.  Politicians went through 75 years of money in less than five.  Parking rates soared. 

Members of the Government-Corporate Monstrosity, Eisenhower's MIC on trillions in federal steroids, waltz back and forth from public service to private profitization.  Emanuel made his base fortune working for an investment bank.  Back on the government side, Rahm Emanuel has economic development money to dangle.

Chicago's former Chief Financial Officer Dana Levinson led numerous toll road and parking privatizations.  Levinson is now with RBS North America Infrastructure.

Chicago's parking leaseholders read like an Emanuel donor list.  Which ones will win Midway Airport?

Tuesday, April 17, 2012

Carlyle Co-founder PEU Stakes

Who wouldn't look at a graphic like that and not want a piece of the action? That's what Carlyle's co-founders are counting on. The Motley Fool weighed in

Investors are down on (private equity IPO's) for two reasons. First, as I discussed last week in relation to the tepid reception of Oaktree's listing, investors struggle to value the performance fees in private equity funds due to their convoluted ownership structure.

And second, there's a perception that the public markets are merely the dumping ground for the industry. Unlike most companies, which sell shares to raise capital for growth, the firms above went public after experiencing exceptional growth. If they don't need the capital, maybe they're just going public to help their founders get rich at the public's expense?

Line up unit-holders for your stake in a private equity underwriter (PEU) and the opportunity to indemnify billionaire co-founders from tax increases.  Unit holders have a purpose, liquefy, crystallize, monetize, provide co-founders ka-ching.

Carlyle Yanks AvanStrate IPO

For the second time in a year The Carlyle Group pulled AvanStrate's independent public offering.  Avanstrate makes glass for liquid crystal displays.

U.S. buyout firm Carlyle last month revived the offering  

Much changed in a month:

“We decided to cancel the IPO after considering conditions for the stock market and the market for liquid crystal displays,” a Tokyo-based spokesman for AvanStrate said on Tuesday."

Market conditions? Hmmmmm....

Monday, April 16, 2012

Carlyle & 21 Investment Banks: Hard Sales Pitch

Would you buy NASDAQ units from these two men? I bet few, if any Carlyle Capital Corporation (CCC) investors line up for The Carlyle Group's latest IPO, not unless burned investors reached a secret out-of-court settlement and have money to burn.

The Roadshow has Carlyle's co-founding DBD's doing hard sales.  The IPO shifted from co-founders' liquefying a portion of their stake to pricing the IPO such that small investors make a little money right off.

Co-founder David Rubenstein and company used a "puffery" defense with SemGroup shareholders livid about losing their investment.  SemGroup, LifeCare Hospitals, Stallion Oilfield Services, Oriental Trading, Hawaiian Telecom, Edscha, IMO Carwash, BlueWave Partners, Verari Systems, Willcom and Church Street Health Management join CCC as untold IPO stories.  Some things are better undiscovered and  not discussed.

Carlyle to Price On or About May 2nd

The date came from Carlyle's Roadshow

Sunday, April 15, 2012

Carlyle IPO Picking Up Steam

The Carlyle Group is filings S-1/A's at increasing speed.  After going months between IPO amended filings, Carlyle filed updates within days.  Their third filing in April is expected tomorrow (the 16th).  WSJ reported:

Carlyle Group plans to sell 30.5 million shares priced between $23 and $25 in its initial public offering, which could come before the end of the month.

These are all new shares, according to Carlyle.  No existing owner will sell shares in the IPO.  

No Carlyle employees—including founders David Rubenstein, William Conway and Daniel D'Aniello—are selling stock in the IPO. Nor are major stakeholders such as the California Public Employees' Retirement System and Abu Dhabi-based Mubadala Development Co.

With no one looking to cash out, there is little incentive to push shares at a higher price and risk a clumsy debut, these people said. Instead, Carlyle's current owners are betting that the shares created for the offering will gain value, erasing the dilution they'll see in the value of their stakes at the onset.
Pay attention to future S-1/A's.  Carlyle's co-founders publicly stated they want to liquefy their stake.  Will they sneak in a few shares prior to the IPO? 

Generous Carlyle is leaving a little on the table for the little guy.  That co-founder love should help generate investor interest, along with media hype.  Carlyle lined up WSJ, WaPo, Bloomberg and the Chicago Tribune to tell their story.  .

Carlyle's IPO is picking up steam.  The pace of filings increases. Climax expected within two weeks.

Update 4-16-12:  Carlyle's latest S-1/A is on Edgar.

PEU Happy Hour: Sexy Indonesia

Crain's New York Business reported:

Discover Indonesia, the World’ Sexiest Destination for Investments, with Edgar Perez @ Private Equity Happy Hour
The last time private equity and sex interacted, the globe experienced a financial implosion.

It shouldn’t come as a surprise that new investors are pushing into Indonesia’s private-equity market; newcomers will compete for deals with global firms such as KKR, Carlyle Group, TPG Capital and CVC Capital Partners, plus local firms such as Northstar Pacific Partners, Saratoga Capital, Yawadwipa and Falcon House. Firms are now shifting focus to companies that will benefit from growing consumption in the world’s fourth-most populous nation, 240 million people, away from natural resources investments.
Funny, Indonesia is alluring again.  Drink up at the PEU Happy Hour, but beware any urges.

Friday, April 13, 2012

Forbes Detects 2008 Smell: Is it PEU?

Forbes reported three situations reminiscent of the financial crisis in "Things Starting To Smell Like 2008 All Over Again."

1)  Subprime lending is back, albeit not at 2008 levels.  Loan offers abound for the less than credit worthy

2) A private equity underwriter (PEU) plans to go public.  It was Blackstone in '08.  It's The Carlyle Group in 2012.

3)  Rising oil and gasoline prices. 

Forbes sees another Lehman on the horizon.  Financing long term assets with short term money ends badly on a regular basis.  I'll add a fourth similarity to Forbes' three, the failure of a private equity underwriter.

4)  Arcapita declared bankruptcy, much like Carlyle Capital Corporation did in Spring 2008.

It remains to be seen 2012's similarity to 2008.  Early spring breezes carry a PEU odor.

Thursday, April 12, 2012

JP Morgan Market Prediction Hurts Carlyle

Oaktree Capital's languishing IPO did little to help The Carlyle Group, another private equity underwriter (PEU) with its plans to go public.  JP Morgan is one of three lead investment banks for Carlyle's IPO.  ZeroHedge reported:

For those who believe in this sort of thing, here is JPM's Chief Technician Michael Krauss, who says that "The “one way” market rally since Dec-Jan is over. Expect weeks, if not months of lateral movement." Well, there's that. Then there is the only thing that matters in "markets" these days - which way Ben Bernanke sneezes. Everything else is meaningless: McClellan oscillators, Ichimoku clouds, RSIs, oh and of course, fundamentals.

This may explain why Carlyle added 18 other investment banks to push their IPO, which grew from $100 million to a hoped for $1 billion.  That's a pile of PEU to push.

Paul McCartney: PEU Poet?

Businessweek reported on NYC happenings last night.  Paul McCartney

Financial bubble, dollars, material bubble, to learn to relax” he said. “Suburbs, John Cage, what’s what,” he added. “Dress up, pretend, pretend, pretend.”

It's not clear who his remarks were intended for.  Could it be Paul Hewson (Bono) or Bob Geldorf, both private equity underwriters (PEU's)?  Across town Carlyle Group co-founder and PEU David Rubenstein was at the Lincoln Center.  Rubenstein and his ilk helped bring about the financial bubble.  He also likes to dress up.  

Carlyle IPO No Rights, but Founder Tax Indemnification

The Carlyle Group's S-1/A filed on April 10, 2012 stated:

We will enter into a tax receivable agreement with our existing owners whereby the corporate taxpayers will agree to pay to our existing owners 85% of the amount of cash tax savings, if any, in U.S. federal, state and local income tax that they realize as a result of these increases in tax basis.

Existing owners are billionaires William Conway, Daniel D"Aniello and David Rubenstein.  They remain firmly in control.  .

Our general partner, Carlyle Group Management L.L.C., will manage all of our operations and activities. You will not hold an interest in our general partner, which is wholly-owned by our senior Carlyle professionals. Unlike the holders of common stock in a corporation, you will have only limited voting rights and will have no right to remove our general partner or, except in limited circumstances, elect the directors of our general partner.
They want Carlyle unit holders to fund any future tax increases, to the tune of 85% shareholders and 15% co-founders.

What does this mean?  Billionaires win...

Wednesday, April 11, 2012

Oaktree Response Underwhelming

Reuters reported:

Oaktree Capital Management sold fewer shares than expected in an initial public offering that priced at the bottom of an expected range on Wednesday, a market source said.

Oaktree, which had $75 billion of assets under management as of the end of 2011, priced 8.84 million shares at $43, raising $380.3 million. It had intended to sell 11.3 million shares at between $43 and $46 each.
I crafted a series of scenarios for Oaktree's IPO.

Oaktree's performance puts it squarely into the "Craptree" category.

Craptree -- The company prices at the low end of the range, then muddles along

The offering had a touch of "Yaktree", given the offering fell nearly 2.5 million shares short of the planned 11.3 million shares..This flies in the face of reports Oaktree was "three times covered" on the buy side.

Yaktree -- The issuance is withdrawn due to investors getting sick at the prospect of owning the company.

Oaktree is the bellwether for upcoming private equity underwriter (PEU) IPO's.

The tepid response to the IPO raised concerns that investors have become wary of private equity manager flotations, including the upcoming offering from Carlyle Group LP.

Should Carlyle's IPO pull a Craptree/Yaktree, I might have to label it The Ca-Bile Group.   

Update 4-12-12:  Oaktree traded as low as $41 in its first day on the NYSE.  It closed at $42.39, down 1.4% from its IPO price.   That meets my Craptree criteria.

Tuesday, April 10, 2012

Carlyle Group, As Goes Oaktree

The Carlyle Group's IPO is targeted for early May, according to Bloomberg.  Carlyle's $100 million IPO grew by eight to $800 million.  That comes from selling 10% of the private equity underwriter (PEU), valued at $8 billion.  Did Bloomberg's "knowledgeable sources" come from any of the 21 investment banks hawking Carlyle units?

Carlyle will gauge the IPO market tomorrow based on Oaktree's reception and the direction of the stock market.  If Oaktree isn't warmly welcomed and the market continues to decline, Carlyle may delay their investor "dog and pony" show.

How long ago did Carlyle conduct road shows on BlueWave Partners (hedge fund) and Carlyle Capital Corporation (publicly traded mortgage credit fund).  When sued by investors upset about losing millions on SemGroup, Carlyle claimed puffery as a defense.

Consider the following extreme Oaktree scenarios, neither of which is likely to come true:

Soaktree -- The firm prices at the top of the range, rises at the open and holds above the IPO price for the first day.

Yaktree -- The issuance is withdrawn due to investors getting sick at the prospect of owning the company. 

That leaves at least three more options:

Craptree -- The company prices at the low end of the range, then muddles along

Naptree -- The firm prices in the middle of the range, then dances around its IPO price

Taptree --The firm prices above midrange and closes at the high for the day.
Carlyle will be reading the leaves.  Carlyle's co-founders assert they won't sell their shares.  That's in contrast to numerous quotes from Carlyle's David Rubenstein about his desire to monetize, liquefy his stake

Oaktree lobbied hard to keep PEU preferred "carried interest" taxation.  Carlyle did likewise.  David Rubenstein personally visited the Capital to lobby against an increase.  President Obama seems happy to give Oaktree and Carlyle owners a chance to cash in their founder stakes at carried interest rates.  The question is how much will founders ring the register?

Sunday, April 8, 2012

Oaktree Capital IPO: Carlyle Group's Canary

CNBC reported:

Private-equity firm Oaktree Capital Management kicks off an estimated $2.2 billion of U.S. initial public offerings next week, the busiest flurry of offerings this year.

The most significant debut is Oaktree Capital Management, which is considered a gauge for the highly anticipated IPO from Washington D.C.-based private-equity company Carlyle Group later this quarter.

"Oaktree is going to be a litmus test for other such offerings, most notably Carlyle," said David Menlow, president of research firm IPO Financial. "If market sentiment is not up to snuff and the deal falters, it will have been the sacrificial lamb and will cause other offerings in the space to reconfigure their deals."

Oaktree, which had roughly $75 billion in assets under management at the end of 2011, expects an offering of 11.3 million Class A shares to be priced between $43 and $46 a piece.

Tha pricing would raise between $450 million and $500 million for Oaktree, which sold nearly a third of the firm in two private placements, the first in 2004 and the second in 2007.

The Carlyle Group purports to raise a mere $100 million in its IPO.   In 2001 Carlyle sold a 5.5% equity stake to CalPERS, a huge pension fund, for $175 million.  It later did two deals with Mubadala Development Corporation, a United Arab Emirates sovereign wealth fund.  In 2007 Carlyle sold a 7.5% stake to an affiliate of Mubadala Development Co. for $1.35 billion in cash.

Carlyle's latest S-1/A implied Carlyle might sell 10% of the firm.  That's well above $100 million based on prior CalPERS and Mubadala deals.  Carlyle's co-founders want to liquefy, i.e. cash in.   

Oaktree's looming IPO puts Carlyle in a good position:

"If market sentiment is not up to snuff and the deal falters, it will have been the sacrificial lamb and will cause other offerings in the space to reconfigure their deals."  
Will Carlyle have to reconfigure?  Only twenty-one investment banks know for sure.

Saturday, April 7, 2012

Fran Townsend's Latest Board Slot - SAP NS2

The Government Corporate Monstrosity (GCM), Eisenhower's Military Industrial Complex on trillions in federal steroids, is multi-layered.  Note:  Frances Fragos Townsend picked up another board slot in this MarketWatch press release..   

"SAP NS2 and its parent companies enjoy the trust of national security and intelligence agencies and the leading companies in critical economic sectors," says Frances Townsend, chairman of the SAP NS2 Board of Directors and former Assistant to the President for Homeland Security and Counterterrorism. "Some of the most demanding and security-sensitive applications and databases in the world run on SAP and Sybase technology, delivered by SAP NS2." 

Add another notch in her GCM rope.  Fran sits on the board of SIGA Technologies, a MacAndrews & Forbes holding.  Their latest DEF-14a stated:

Frances Fragos Townsend has served as a director of SIGA since March 2011. Ms. Townsend is Senior Vice President of Worldwide Government, Legal and Business Affairs at MacAndrews Holdings and has held this position since October 2010. Ms Townsend previously served as Homeland Security Advisor to President George W. Bush from May 2005 until January 2008.

In the above role, Fran conducted the post-mortem on the Bush White House's Hurricane Katrina response.  She omitted any mention of the hospital with the highest patient death toll, LifeCare Hospital of New Orleans, which lost 25 patients in Katrina's aftermath.   The politically connected Carlyle Group purchased LifeCare weeks before Katrina struck.  For what I view as gross incompetence, Fran landed a number of key assignments and board appointments.

Ms. Townsend also currently is an on-air contributor for CNN as a counterterrorism, national and homeland security expert. She serves as director of DRS Technologies and Thomson Reuters in addition to numerous government advisory and nonprofit boards. Ms. Townsend is the chairperson of the Intelligence and National Security Alliance and a member of the Council on Foreign Relations and the Trilateral Commission. Her extensive experience in government, combined with her legal acumen, is ideally suited for our business.
Her experience may benefit SIGA Technologies, Scientific Games, DRS Technologies, SAP NS2, MacAndrews & Forbes, and Monument Capital.  It's a shame CNN and Thomson Reuters can't figure it out.

Fran's riding the GCM for all its worth.  . There are no lone wolves in the GCM, where loyalty to the pack leader is critical.  She runs with the Red Pack, but started with the Blue Team under President Clinton.  Clinton's "good ole boy" intelligentsia hid his corporatist ties.

Fran proudly wears her corporatism.  How much revenue does Uncle Sam provide to Fran tied companies?  One might expect SAP NS2 to have that information in their database.  How long before that data dump?

Update 11-1-15:  Fran joined the Advisory Board of Protivit earlier this year.

Showing "the Carry"

The super wealthy pay lower taxes because much of their earnings are not income.  I added two lines to the above chart to display this fact.  First, private equity underwriters pay a preferred 15% tax rate called carried interest.  Second, the financial firm is a virtual nonprofit as investors and PEU owners are the only ones paying this discounted tax.  I hope this graphic makes those two points clear.

D.C. Bee Friends

WSJ highlighted UBS CEO Robert Wolf's friendship with President Obama.  The piece closed with a quote from Carlyle co-founder David Rubenstein::

To some financial clients, the (Obama) friendship is a plus. David Rubenstein, a UBS client who worked in the Carter administration before going into private equity and founding Carlyle Group, says, "It's always nice to talk to someone about what people in the White House are thinking. But Robert also has a good feel for what firms are doing and thinking. If a Republican were president, I don't think his business would suffer."
Rubenstein likely has carte blanche access to the White House.  Early in the Obama Presidency David Rubenstein was a frequent visitor. Rubenstein dined with Obama Chief of Staff Rahm Emanuel.  I imagine Rubenstein's loaning his copy of the Emancipation Proclamation to the Oval Office helped maintain his access.

Rubenstein kindly offered a UBS endorsement, given his multibillionaire status.  I bet that made UBS Wealth Management Americas happy

Senator Phil Gramm, the man who deregulated finance in the late 1990's alongside President Bill Clinton, served as Vice Chairman of UBS.  Here's how UBS spun Gramm-Leach-Bliley.

As Chairman of the Banking Committee, Senator Gramm steered through legislation modernizing the nation's banking, insurance and securities laws.
Gramm and Clinton's modernizing led to private equity's explosive growth.  It also resulted in a postmodern financial implosion.  Phil Gramm stepped down as Vice Chair of UBS in February 2012.  He'll now serve as a consultant to the firm.

Obama just signed the JOBS Act, which creates a new market for UBS and Wall Street, crowdfunding and easier equity raising.  In a Gramm-Clinton like manner, the bill's provisions could lay the foundation for the next financial crisis.  Will it happen in less than a decade?

Where will Phil Gramm be, should it hit?

Gramm added:  “I will be working in a few targeted areas for the bank next year and hope to find some noble work yet to be done before I settle into my rocking chair on the front porch of Goat Cave Ranch."
Rather than highlight Gramm's role in the near collapse of the global financial system, Robert Wolf offered:

Wolf said: “Over the years, Phil has become a great friend to me and other senior leaders at UBS. His humor, candor and keen insight will be sorely missed at our firm and in Washington. We all wish Phil our best and thank him for his years of dedicated, hardworking service to UBS.”

Gramm, Wolf, Obama, all good friends.  That's the way the Government Corporate Monstrosity works.  Sure it gets heated when the Reds and Blues compete for the right to send billions to their friends, but once the election is over, the GCM hums.  There's honey to raid.

Update 6-30-12:  The Motley Fool cited the JOBS Act's fraud potential, calling it a Pandora's Box.  .