Hope you enjoy this chat about private equity on the RT show Boom/Bust from Friday. We were on for two segments, with the conversation focusing on abusive practices by private equity landlords and their economic model (such as it is) for that business. We continued with a discussion of the conditions facing private equity firms in their traditional business of buying and selling companies, and the recent, remarkable SEC discussion about the high level of lawbreaking and serious compliance failure they are finding in regulatory exams. If you want to skip past the discussion of Deutsche Bank’s Las Vegas misadventures, our segment starts at around 3:45.
BTW the folks in the New York remote studio went to some trouble to warm up the coloration of the lights, but I find in a lot of remote studios that the lighting somehow flattens the speaker’s face and unwittingly emphasizes the “talking head” quality of business TV. Maybe that serves as a sort of genre marker.
Due to time constraints, I could only discuss how the crisis and its aftermath has made the traditional private equity business more challenging than it has been for quite some time in passing. Lambert pointed out a Bloomberg article on Friday that provided additional detail. Key extracts:
If you can’t buy whole companies then buy bits and pieces of them. That’s the logic propelling private-equity firms this year as they gobble up divisions shed by their parent.
These so-called carve-outs are giving private-equity firms something to buy and clean up, at a time when leveraged buyouts of entire companies have all but stopped, as U.S. stock indexes reach records….
Private-equity transactions overall have fallen 22 percent to $53 billion through April, data compiled by Bloomberg show, led by the drop in buyouts of public companies. The value of those leveraged buyouts declined to $3.2 billion compared with an average of $34 billion in the 10 years through 2013.
The peak for buyouts came before the financial crisis, when U.S. funds struck $659 billion of deals from 2005 through 2007, including the purchases of HCA Inc., Hilton Worldwide Inc. and Biomet Inc., the data show. Buying inexpensive public companies was generally easier for the funds than carve-outs are, said Raymond Lin, a mergers and acquisitions attorney at Latham & Watkins LLP.
“The easy days for private-equity buyers are over when they profited from buying undervalued companies,” he said. “Carve-out deals require a lot of up-front work that would incur additional costs and could affect returns.”
OMG, private equity firms might have to work hard to make money? What a concept.
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I would have asked one other follow up question, which is, do what degree are PE firms still buying up houses in the Sun Belt, have they moved onto other distressed areas, or has that ship sailed, in general? I’ve noticed that, in nicer areas here in Cincinnati, a distressed area honestly, cash buying of single-family homes has shot up this spring, causing a price hike of around 10% recently. It’s become a bit of a sellers’ market in any area where there hasn’t been a lot of foreclosures, but where there’s still some distress in the market. It seems as though these big players are branching out into the Rust Belt, perhaps? Thanks for any insight, because, yes, that interview was cut entirely too short.
Oof, this is predictable but not good unless it’s locals buying the homes.
One big advantage of homes in the Sunbelt is way lower maintenance. Any place that gets snow and ice has even more maintenance requirements than a home in a region that never or rarely gets below freezing temperatures. I lived for a bit of my childhood in Dayton (just a 45 minute drive from Cincinnati) and I recall lots of days trudging home through the snow.
Magnetar did buy a portfolio of homes near Dayton, in Huber Heights, but that was a unique situation. There was already a management company in place, so the maintenance costs and procedures were known and priced into the deal. Magnetar filed to get real estate tax reductions on all the homes it had purchased to goose its profits. The city astutely gave them breaks on only 20% (as in enough to look like they’d given this real study without giving the tax base away to a hedgie).
I thought the program was excellent and the format allowed more time for depth. It is sad that the only useful news programs on TV are from foreign country outlets – specifically the BBC (30 min news summaries), the RT (BoomBust and The Big Picture), and especially al jazeera which is the best news channel by far. Except for Rachael Maddow who sometimes does investigative reporting and can provide interesting background, the rest (especially CNN which is utterly useless IMO) are not serious journalism and Fox is ,well, Fox.
What would we understand without the internet which is ,of course, under attack from the usual suspects.
Jim
Thank you for posting your interview, Yves. As always, I learned much. I hope the SEC will follow up on their assessment or the shenanigans in this space, and that limited partners will begin to pay attention to the underlying documents and reporting.
I directed a friend to your interview this morning. He was laid off by a Fortune 500 company last month after more than two decades with them and is casting about for something to do. He has excellent people and management skills and is very handy with tools. Perhaps there is an avenue to reemployment for him with a private equity firm or a trustee for these securitized properties. Whether it works out for him or not, thank you for the spark of an idea. In terms of raw fundamentals, it seems to me that the PE firms are woefully understaffed and lack personnel with the requisite skills; i.e., they bit off much more than they can chew. Wonder how much of all this was driven by political “extend and pretend” gaming, and what the back end commitments might be. The massive purchases of these antiseptically labeled “distressed properties” appears to be part of a broad, coordinated effort.
I am also impressed with how well Erin Ade is performing her job after what I viewed as a somewhat rocky start.
I wish it were just that Blackstone et al. lacks the skills to properly manage their properties, but from what I’ve read of the complaints (and the Internet is littered with them), it’s likely that they are intentionally undermaintaining their properties because they can get away with it. Tenants have little power and, at least in Sacramento, the local press is so enamored with a private equity firm investing here that there hasn’t been a single report on their bad behavior.
One of their more recent innovations is signing a lease after promising that the property will be in move-in condition and then not making the repairs and improvements promised. In some cases the tenants have described the houses as “filthy.” But the tenant has already signed the lease and paid money, and more importantly, given notice at the home she’s vacating, so she’s stuck. In addition, there are some things you won’t know about until you move in (how much do gas and electricity cost, does the fridge actually keep things cold, is the dishwasher properly installed) and getting them to fix those problems, particularly in the “lipstick on a pig” properties is difficult to impossible.
I wasn’t given the opportunity to address this in the interview. TV is a very confined format and you don’t have much wriggle room in terms of time or topics. Boom/Bust in an investment oriented program, so they focused on the economic issues. I have discussed the issue of Blackstone trying to push maintenance obligations, contrary to local laws, onto tenants in two posts:
http://www.nakedcapitalism.com/2014/04/blackstone-slumlord-wannabe-violates-local-housing-laws-making-tenants-maintain-rentals.html
http://www.nakedcapitalism.com/2014/05/blackstone-unit-sued-over-slum-like-condition-of-single-family-home-rental.html
I did address the issue of Blackstone’s (and American Home 4 Rent’s and Colony’s) intent by saying they didn’t remotely have enough staff. That’s not an accident. That’s design. But it is astonishingly stupid. You don’t want tenants fixing leaks or otherwise maintaining property. You are guaranteeing over time that a house will be trashed. Even if the tenant wants to make the fixes out of frustration and desperation, 95% won’t have the skills and so will just paper over a problem that will continue to damage the property.
f the landlord gets a few things wrong, they may just lose some tenants or experience higher than expected expenses. If they get more things wrong, and Blackstone here is clearly “getting more things wrong,” theystart doing real damage to their physical collateral. If they get a lot wrong, they may experience rent strikes or local changes in law that hurt them. In NY and other cities, that les to wholesale landlord abandonment of neighborhoods – the properties were trashed, the laws and courts went against them and they gave up – leaving the neighborhoods in ruins. The full cycle takes place probably over 10-15 years, but the reduction in value can happen within two years. Individual homes require constant maintenance against the elements and wear and tear. Without constant maintenance, the landlord will face more serious expenses later (2-3 years down the road) and/or loss of pricing power.
Do PE’s serve any good to the real economy and society or are they nothing more than another financial vehicle for robbery? Is there an upside to the economy and society in general if PE’s never existed?
On balance, yes. There are firms that focus on operational improvements, and many of them do a decent job of that. But the majority of industry dollars goes to large and mega deals. They use aggressive cost cutting and financial engineering to meet their return targets.
And the ripple effects of the actions on the large deal end are significant. They squeeze suppliers, which often lead them to reduce staffing. They pressure non-PE-owned competitors to make similar cost reductions. They serve to justify paying business executives boatloads of money for slashing costs rather than improving the business. Those behaviors have a big effect on public companies. If you read historical studies of how the “companies exist to maximize shareholder value” belief system became established, a big justification was the LBO wave of the 1980s and the defensive responses of public companies. So the impact goes way beyond the direct action of the private equity firms.
The host is incredibly distracting with her wild gesticulations and bizarre verbal outbursts and jokes. It’s like a bad stand-up act on drugs. WTF