A Warm Welcome to Our New Private Equity Readers

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Welcome! We anticipate that some of you are new to this site and have visited to access the 12 private equity limited partnership agreements that we published in searchable form. You can find them here and here.

But we also thought you might want to familiarize yourself with our recent coverage of the private equity industry.

By way of background, I’ve been in and around the financial services industry for my entire career. I joined the corporate finance department of Goldman in the early 1980s, when Wall Street was criminal only at the margin. I then went to McKinsey, and in the mid-1980s, started up and led the mergers and acquisition department for Sumitomo Bank, then the world’s second largest bank. Next, I founded a management consulting practice that did McKinsey-style consulting for wholesale banks and trading businesses, and also provided transaction advisory services to private equity firms, hedge funds, and substantial individuals (Forbes 400 level).

In 2006, I launched Naked Capitalism, which provides incisive analysis and commentary on finance and the financial services industry. We have an active following on the Hill and at all the major financial regulators.

Over this period, we’ve written over 200 posts on private equity. In the last year, we’ve increased our focus on the industry. In addition to the limited partnership agreements release, other stories we’ve broken include:

Los Angeles Public Pension Fund Tells Us It Is a Happy, Trusting Victim of Investment Managers (2014)

Claire’s Stores: Private Equity Broker-Dealer Violations in Action (2014). How Apollo couldn’t be bothered to comply with most of the usual niceties to make transaction fees look like fees for services that were actually provided.

IRS Wakes Up to Private Equity Scam (2013). On how an IRS crackdown on management fee waivers (the device used to obtain capital gains treatment) is underway.

Why You Should Not Trust the Financials of Private Equity Owned Companies (2013). On how a widely used software platform, iLevel Solutions, is built from the ground up to convince PE investors and the SEC that Blackstone and other PE firms have implemented robust financial controls over the companies they own. The reality, however, is the opposite: by design, iLevel gives PE firms unprecedented ability to cook the books of their portfolio companies while maintaining a facade of compliance.

How Private Equity Executives Like Blackstone’s Tony James Engage in Dubious Side Deals (2013)

Memo to Eliot Spitzer: If Even Harvard’s Own Law Firm is More Loyal to Bain, How Can You Get Good Legal Advice? (2013)

In addition, we’ve provided commentary and analysis on the private equity industry, such as:

New York Times’ New Editor Buries Important Story on Private Equity Fee Shenanigans on Holiday Weekend (2014)

Wall Street Journal Exposes Possible Grifting by Private Equity Kingpin KKR and KKR Capstone (2014)

SEC Official Describes Widespread Lawbreaking and Material Weakness in Controls in Private Equity Industry (2014)

NY Teachers’ Retirement Fund Exhibits Stockholm Syndrome, Rejects Reuters Private Equity FOIA Out of Fear of Annoying Private Equity Funds (2014)

McKinsey Gives “Dare to Be Great” Speech to Private Equity Investors as Returns Fall (2014)

Private Equity’s Lake Woebegon Fallacy: All Investors Are Above Average (2014). On how the widely-accepted premise that investors can invest solely in top-quartile funds is absurd on its face

Private Equity Industry Floats Trial Balloon For “Get Out of Decades of Flagrant SEC Abuses for Free” Card (2014)

Focus on TBTF Banks Misses How Even More Powerful Private Equity Kingpins Are Moving More into Unregulated Parts of Banking (2014)

Wall Street Journal Exposes Entirely New Private Equity Tax Scam (2014)

Whistleblower Describes How Private Equity Firms Flagrantly Violate SEC Broker-Dealer Requirements (2013)

Matryoshka Doll, Private Equity Edition (2013)

Memo to Eliot Spitzer: Private Equity Firms are Scamming New York City (2013). We highlighted early that the SEC was discussing fee abuses at private equity firms (admittedly then in general language). We discussed why the industry was so keen to keep limited partnership agreements secret:

The sad truth is nobody who invests in PE looks closely at whether PE firms are complying with the fee and expense provisions of their agreements. Part of the reason is that the PE firm lawyers draft the terms in these LPAs to be almost incomprehensible. Another reason is, astonishingly, that PE investors have accepted the argument of PE firms that these contract provisions are a form of “trade secret.” Public pension fund investors have almost universally acceded to the demands of PE firms to exempt the LPAs and cash flow reports from state FOIA laws, which keeps the eyes of the press and the public off the documents.

This information lockdown prevents a worst-case scenario for scamming PE firms, that a mid-level accounting employee at a portfolio company would use public documents to compare the payments made to fund investors with what was taken from the portfolio company where the accountant works. State qui tam laws, which are designed to prevent precisely this type of abuse by awarding a portion of the government’s recovery to people who uncover fraud, would provide a powerful incentive for employees at portfolio companies to rat out their PE overlords. But that’s not going to happen as long as public pension fund PE investors keep the contracts and cash flows behind the FOIA wall.

Why is a Price-Fixing/Collusion Lawsuit Against the Biggest Names in Private Equity Getting Only Cursory Notice? (2012). On a class action lawsuit, Dahl v. Bain Capital Partners, against the eleven biggest and most blue-chip names in the private-equity industry, including Blackstone, Carlyle, Goldman, and TPG, for price collusion on “club” deals.

We’ve also discussed the private equity rush into the single family rental market:

We Speak About Private Equity Rental Housing and SEC Problems on RT (2014)

Slumlord Wannabe Blackstone Violates Local Housing Laws by Making Tenants Maintain Rentals (2014)

Rental Income Falls 7.6% in Three Months in Blackstone’s First Home Lease Securitization (2014)

How the Foreclosure Crisis Made the Rich Even Richer (2013)

Banks Outbidding Private Equity Funds at Foreclosures, Believing They Can Beat Them at the Pump and Dump Game (2013)

So Who is the Dumb Money Ruining the Rental Housing Market? (2013)

Private Equity Residential Landlords Rushing to Cash Out via IPOs(2013)

We’ve also had a series of posts from an industry insider:

Private Equity Collusion on Deals (2012)

Private Equity: The Mechanics of Intellectual Capture (2012)

Private Equity Fund Terms (2012)

Private Equity: A Government Sponsored Enterprise (2012)

Some of you may have read Chris Witowsky’s coverage in peHUB about our ongoing efforts to pry private equity return data out of CalPERS:

New York Times Column Strikes Back, Obliquely, at Our CalPERS Private Equity Data Suit (2014)

CalPERS Tries Ineffective Mudslinging in Response to Our Ongoing Private Equity Investigation (2014)

Prominent Retiree Chides CalPERS for Repeating Conduct that Led to Past Private Equity Scandals (2014)

Reuters Writes About Our Suit Against CalPERS to Obtain Private Equity Data (2014)

We Sue CalPERS Over Denial of Our Private Equity Public Records Act Request (2014)

* * *

Over the coming months, I anticipate we’ll get to know each other even better.

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  1. Dan H

    “I joined the corporate finance department of Goldman in the early 1980s, when Wall Street was criminal only at the margin.”


    1. psychohistorian

      Yeah, that was back when Wall Street was only partially pregnant, just at the margin.

      Thanks for exposing the tools of the greedy bastards, Yves. We will celebrate when some are in jail.

      1. JGordon

        Do white collar criminals even still go to jail/prison? I thought that was something that only happened in movies these days. I think we have reached such an advanced stage of decay as a society that you’re more liable to find that rather than running from the justice [sic] system you are much more liable to find that these are the individuals running the justice system.

        1. cwaltz

          Heh. Nowadays a good lawyer could make sure they don’t spend a day in jail due to “affluenza.” God bless the best justice system money can buy!

        2. Vatch

          A white collar criminal will go to prison if his or her victims are sufficiently wealthy. See the list of Bernie Madoff’s biggest victims:


          Prison is also a possibility if the event will be widely discussed by the polloi. An example is Martha Stewart’s incarceration, which was an object lesson for those of us in the underclass. But in general, your question hits the nail on the head — far too many white collar criminals avoid prison entirely.

      2. Yves Smith Post author

        Actually, criminal behavior is more like cancer.

        Your body is growing cancers all the time, but somehow they normally recede. In other cases (like many breast tumors in older women) the cancer grows so slowly that the individual dies with them rather than from them. That is why full body scans have turned out to be a bad idea. They show all sorts of abnormalities, the overwhelming majority of which are harmless.

        It’s when you’ve got cancers that grow to be big and start interfering with the performance of critical body functions that you get in trouble.

        1. Vatch

          Eating broccoli, tomatoes, and tofu helps to keep those incipient crime-like tumors in check. I guess Eric Holder doesn’t like broccoli, tomatoes, or tofu.

        2. Petit Bourgeois Rentier Capitalist

          Tks for this wonderful list of equity resources Yves.

          Your use of the finance capitalism / cancer analogy got me wondering if it has been taken further and more analytically. A quick Googlescholar search suggested no or not much. I find this surprising but perhaps there just aren’t enough economists fluent in cancer growth theory or biological modellers who have applied ecosystem theory to economics (Perhaps the ecological economists).

          The search did, however, reveal this from 1998 apparently from you long time contributor Michael Hudson where he uses the analogy repeatedly.

          Though 16 years old this feels scarily applicable to the present as well your equity series.


  2. monday1929

    Yes, welcome new readers. You will find some of us harder to dismiss than Occupy. I worked on a trading floor for eight years and ran a precious metals trading desk. Some of us would like to see a return to a Rule of Law, and even, maybe, a stab at Capitalism- you know, where failed companies fail. In other words, we are Dangerous Subversives, some of us are. Welcome new readers.

  3. TheCatSaid

    That’s a most useful compendium of all the NC posts on the PE topic.

    I just read that amazing post about iLevel software used by PE firms–software which claims to be automated (i.e., fraud-proof) which turned out to be just a manual Excel file, which could be tampered with and no accountability. Riveting. And this is just a “minor” topic compared to the 12 LPA documents you’ve just posted.

  4. Christer Kamb

    Another simple tool is Value At Risk(VAR) which have been perceived(by i.e regulators)as an insurance against to much risk. But it is also more like an Exel-file showing different asset-classes and outcomes depending on variables like standard-deviations on historic price-data etc.

  5. Christer Kamb

    Indeed it is. In this example false assumtions, i.e not taking account for domino-effects, changed collateral-rules on i.e rehypothecation(repo) and other tail-risks. To high leverage and To-Big-to-Fail is a bad cocktail.

  6. Christer Kamb

    Sorry Skippy(1:53). The reply-function on my webb-browser does not seem to work properly.

  7. abynormal

    At 42.3 billion candela, the Luxor Sky Beam is the strongest beam of light in the world. Using computer designed, curved mirrors to collect the light from 39 xenon lamps and focus them into one intense, narrow beam, engineers say that a person could read a newspaper by Luxor’s Sky Beam from ten miles up. On a clear night, the Sky Beam is visible up to 275 miles (443 km) away by aircraft at cruising altitude, such as over Los Angeles.[38][39]

    Each of the 39 lamps is a 7,000 watt[40] Xenotech fixture[41] costing about $1,200. When at full power, the system costs $51 an hour to operate, with $20 per hour of that just for its 315,000 watts of electricity.[40] The beam has operated reliably since first enabled on October 15, 1993, and is an FAA designated navigational landmark for aviators.[38]

    The lamp room is about 50 feet (15 m) below the top of the building and serviced by a staff of two workers during the day.[42] The room’s temperature is about 300 °F (149 °C) while the lights are operating.[43] Since 2008, only half the lamps are lit as a cost and energy saving measure.[44] The light might be the world’s best bug attractor, establishing a new ecosystem of moths, bats, and owls.[45]

    ++ Yves’ site makes the luxor beam look like a flashlight ++
    “Light is the symbol of Truth”

    1. rayduray

      Thank you. That was a fun bit of trivia and a wonderful way to compliment our ever-so-deserving host. :)

    1. Eclair

      Craazyman, have I told you lately that I love you? Your brain must be a wondrous place … a combination second-hand book store with acres of dusty volumes housing Plato and Jacquelyn Susann cheek-to-jowl – and dimly-lit antique-cum-used-furniture and old clothes warren with little nuggets of emeralds and rubies hidden behind cushions and in musty pockets. Whereas so many of us have brains that are a fluorescent-flooded Walmart late Saturday night.

      The image of Yves as Kathy Bates has made my morning. I will go forth chuckling and with renewed hope for the universe.

    2. Yves Smith Post author

      Oh, please come up with a different association!

      Yes, Bates won an Oscar for that role, but her character was crazy and wound up dead. Since we are dealing with fiction, where there seem to be more fierce women than in real life, surely you can come up with another suitably intimidating or deadly character.

      1. craazyman

        Oh man, Now I feel like James Caan. hahaha hahahahahah

        How about Avril Lavigne with a sledgehammer! :)

      2. Eclair

        Dearest Yves, you must make allowances for the weirdness of Craazyman’s mind. Rather like catching glimpses of images during a lightening storm, a scene pops up illumined, then drops back into total darkness the next moment.

        No current or past woman springs to my mind as a suitable comparison to you. We have to delve into mythology …. Athena, goddess of wisdom, war and justice is a good fit. And … unlike Cathy Bates’ character, she’s still alive … somewhere out there.

        1. RalphR

          If we are going to include goddesses, didn’t Diptherio nominate Kali? I seem to remember she was misunderstood (as in she was nicer than she appeared to be) and her job was to kill the demons that other gods had stupidly given too much power.

  8. Oregoncharles

    Hilarious, as well as a useful compendium.

    Personally, there isn’t a snowball’s chance in hell that I’ll try to read those LPA’s; the reporting on them is a hard enough slog. So I’m doubly grateful that there are people like Yves and others on the case.

    1. Oregoncharles

      Afterthought: how does this relate to 401k’s and other individual investments? Aren’t there similar issues with mutual funds and the like? Could some of those be going into PE, as well? Not that Yves needs another huge issue to contend with, but drawing any links would make the reporting appeal more widely.

      1. Yves Smith Post author

        Your immediate concern should be that at this very moment, the private equity industry is pushing hard to launch retail products.

        1. monday1929

          No, retail being allowed in means the cleansing conclusion is near.

          How about Joan of Arc? Patti Smith if she was a reporter for a Major Metropolitan Newspaper?

  9. The Dork of Cork

    in the early 1980s, when Wall Street was criminal only at the margin.”

    Yves girl – you crack me up.
    keep it going for the laughs at the very least.

  10. financial matters

    I still like Arwen (Evening Star) for our night warrior. Taking on the orcs and goblins.

  11. Thorstein

    For historical perspective on the private-equity industry I highly recommend:

    George Anders’ “Merchants of Debt: KKR and the Mortgaging of American Business” (1992) and James Grant’s “Money of the Mind: Borrowing & Lending in America from the Civil War to Michael Milken” (1992).

    As a former bond salesman I can personally attest that KKR’s LBO of Beatrice in 1986 set off shockwaves—a topic that both books recount in some detail, an event akin to Netscape’s IPO in 1995 for what it later heralded.


  12. Tom

    Lambert Strether – the good old Ambassadors.

    What a lovely, lovely book. The naughty chad, and that cosmopolitan Madame of his. Strether spoilt their fun somewhat. What he was sent to do by Chad’s mum, I seem to remember. In the process, he rediscovered time, friendship, vanity, beauty, judgement restrained.

    Always loved that book. Realise now that I have come to sympathise with his decision to return home at the end. I used to think – romantically- he shoulda stayed on in Europe with that tough woman – wasn’t she some kind of guide around Paris. They like each other. But Strether was right. What you know, what you dream about: the first is deep, the second condemns you to superficiality – to put it ever so crudely.

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