Q&A: Private-equity returns and the Carlyle Group

What did you think of the compensation and share of the profits paid to the three founders of the Carlyle Group, and did they deserve it?
Obviously, $400 million — the amount the founders earned — is a large amount of money.
But they earned it because compensation is heavily tied to performance in private equity.
Carlyle returned at least $15 billion to its investors this year. The $15 billion represents the [very successful] performance of Carlyle’s investments in companies over the last five to 10 years.
And $400 million is less than 3 percent of the $15 billion. In years that Carlyle does not return money to its investors, like 2009, the founders earn far, far less.
My guess is that the investors in the Carlyle funds are extremely happy with the returns they have received this year even after paying the fees.
Discuss the private business model by which people can earn that kind of money.
The big investors in private equity are pension funds and endowments. In Carlyle’s case, those investors include the Maryland State Retirement and Pension System, the New York State Teachers’ Retirement System and Calpers [the California Public Employees’ Retirement System]. When private-equity fund returns are strong, a lot of pensioners and workers benefit.
Private-equity funds take this capital and use it to buy companies. When the private-equity funds buy the companies, they often use leverage, hence the common name of leveraged buyouts. These days, the leverage is usually on the order of 60 or 70 percent of the purchase price — less than the leverage in most home purchases.
The private-equity funds then work very hard to increase the value of the company. Usually, this involves looking for ways to increase the growth of the business as well as cutting costs. If the values of the companies increase, the private-equity fund and its investors will make money (when the companies are sold). If the values decrease, the private-equity fund and its investors lose money.
Private-equity funds receive an annual management fee on the money invested. For large funds, this is usually 1.5 percent per year. In addition, private-equity funds typically receive 20 percent of the profit of their investments. The founders earned so much this year because they had an unusually profitable year. (It is worth adding that funds get this share of the profits only if their investors earn at least an 8 percent annual return.)
Overall, the performance of private-equity funds has been very strong over the past 20 years. On average, each dollar invested in one has returned 27 percent more than that same dollar would have earned in the S&P 500 or other public-equity fund.
Please explain carried interest and why it is taxed at a lower rate than income tax.
The carried interest is the 20 percent share of investment profits I mentioned above. It is taxed at capital gains rates rather than ordinary income tax rates. That has been the case for a very long time.
There is a lot of debate about whether this is appropriate. Some argue that carried interest is compensation and should be taxed as ordinary income.
The counterargument is that the carried interest represents an investment return and should be taxed like other equity investments. If the carried interest were taxed as ordinary income, I think it also is likely that private-equity firms would be able to avoid much of the tax increase by restructuring the carried interest into equity investments.
Who invests in private equity and how does it work?
As mentioned above, the big investors in private equity are pension funds and endowments.
Do private-equity firms create jobs, destroy jobs or neither?
The best empirical evidence says the answer is that private equity both creates and eliminates jobs. After a buyout, employment in existing operations tends to decline relative to other companies in the same industry by about 3 percent. (This may mean employment actually grows, but just by less than at other companies). At the same time, employment in new operations tends to increase by more than other companies in the same industry by more than 2 percent. Net job losses were relatively greater in retail buyouts. This is not surprising, given that Wal-mart and Amazon have put a great deal of pressure on retailers over the past 20 years. If retail buyouts are not included, it is likely that net employment growth was positive. In other words, there does not seem to be a large net employment effect. That is not to say, however, that some people do not lose jobs. The overall pattern suggests that private-equity firms make firms more productive. They make cuts or grow more slowly when that makes sense, and they invest and grow more quickly when that makes sense.

Online Retail: Amazon Trouble a Signal of Trouble for Other Online Retailers?

Bad news for online retailers: Amazon‘s (Nasdaq: AMZN  ) stock dropped Thursday morning after Goldman Sachs said the online retailer may miss analysts’ fourth-quarter sales estimates, reports Bloomberg.
According to a note from Goldman, the company’s sales may grow 38% from last year to $17.9 billion. That figure misses analysts expectations of $18.2 billion.
E-commerceBecause Amazon in the U.S.’s largest online retailer, and usually outpaces holiday e-commerce spending growth, a dip in sales may serve as an indicator for the online retail market as a whole.
Bloomberg reports data from ComScore.com, which showed Amazon has historically outpaced other online retailers by 23%.
In addition to a variety of products available on Amazon’s site, Amazon also sells its Kindle line. The retailer said it sold “well over” 1 million kindles per week in December, with demand led by its Kindle Fire tablet (via Bloomberg). If Amazon is still losing out, given its additional revenues from Kindles, other e-commerce retailers may be in trouble.
Business section: Investing ideasSo, how could this trend affect other online retailers?
To find out we created a list of popular online retailer trading on the U.S. market exchanges.
Do you think these names will take a hit? (Click here to access free, interactive tools to analyze these ideas.)
1. Amazon.com: Operates as an online retailer in North America and internationally. Market cap of $79.08B. The stock is currently stuck in a downtrend, trading -6.62% below its SMA20, -14.08% below its SMA50, and -14.01% below its SMA200. The stock has performed poorly over the last month, losing 10.44%.
2. E-Commerce China Dangdang (Nasdaq: DANG  ) : Operates as a business-to-consumer e-commerce company in the People’s Republic of China. Market cap of $340.07M. The stock is currently stuck in a downtrend, trading -7.72% below its SMA20, -18.4% below its SMA50, and -62.99% below its SMA200. It’s been a rough couple of days for the stock, losing 5.51% over the last week.
3. eBay (Nasdaq: EBAY  ) : Provides online marketplaces for the sale of goods and services, as well as other online commerce, platforms, and online payment solutions to individuals and businesses in the United States and internationally. Market cap of $39.26B. The stock has gained 7.23% over the last year.
4. IAC/InterActiveCorp. (Nasdaq: IACI  ) : Engages in the Internet business in the United States and internationally. Market cap of $3.49B. Relatively low correlation to the market (beta = 0.61), which may be appealing to risk averse investors. The stock has gained 42.03% over the last year.
5. Overstock.com (Nasdaq: OSTK  ) : Operates as an online retailer offering discount brand, non-brand, and closeout merchandise in the United States. Market cap of $180.89M.  The stock is a short squeeze candidate, with a short float at 10.71% (equivalent to 18.87 days of average volume). The stock has lost 53.61% over the last year.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
List compiled by Eben Esterhuizen, CFA. Kapitall’s Eben Esterhuizen does not own any of the shares mentioned above. Rebecca owns shares of AMZN. Short data sourced from Yahoo! Finance

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Online Merchant Lender Kabbage Raises Another $12 Million

Leena Rao currently works as a writer for TechCrunch. She recently finished graduate school at the Medill School of Journalism at Northwestern University, where she studied business journalism and videography. From 2004 to 2007, she helped lead Congresswoman Carloyn Maloney’s community outreach and relations efforts in New York City. She graduated from Columbia University in 2003, where she was… → Learn More

Atlanta-based startup Kabbage, which provides working capital to online merchants, has closed $12 million in debt financing from Western Technology Investment. In August, Kabbage raised $17 million from BlueRun Ventures, David Bonderman, founder of TPG Capital; Warren Stephens, CEO of Stephens; the UPS Strategic Enterprise Fund, Jim McKelvey, co-founder of Square; and others.
Kabbage, which was founded by Marc Gorlin, Rob Frohwein and Kathryn Petralia, is essentially a way for online merchants and sellers on marketplaces like eBay and Amazon to get capital they otherwise wouldn’t qualify for at a bank. Kabbage uses technology to analyze online merchants’ sales and credit history; customer traffic and reviews; and prices and inventory compared to competitors. And merchants can proactively add information to their Kabbage account to immediately increase their access to capital.
Via PayPal’s Adaptive Payments API, Kabbage makes cash advances available to eBay and other online marketplace sellers fairly quickly (Kabbage says that many transactions take as little has ten minutes). Kabbage is currently available only to U.S. businesses.
The new financing will allow Kabbage to expand the working capital available to its customer base of more than 10,000 e-commerce companies.

Kabbage provides financing options for online merchants. Kabbage provides financing to online sellers, leveraging information generally available from online marketplaces to assess risk and help determine advance amounts and related fees and interest. There is a rapidly growing delta between small-to-medium businesses’ need for credit and its availability from traditional sources. For the large and growing segment of online retailers who offer their products via online marketplaces, representing over $48 billion on Ebay alone in 2008, the…

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EquaShip Closes Second Investment Tranche to Complete $1.5M Funding Round

EquaShip, America’s new fourth parcel carrier catering to small- and medium-sized business shippers, today announced it has closed an additional financing round of $600,000.
Seattle, WA (PRWEB) December 07, 2011
EquaShip, America’s new fourth parcel carrier catering to small- and medium-sized business shippers, today announced it has closed an additional financing round of $600,000.
This new financing tranche completes the company’s initial $1.5 million funding. The company announced a first tranche of $900,000 in June, which was used largely to build out EquaShip’s IT infrastructure and Customer Care Center.
The additional tranche will be used primarily for additional software feature development and expansion of EquaShip’s network of drop-off locations, said Ron Wiener, company founder and CEO.
The EquaShip.com website was launched in beta mode in November. Wiener said the company expects to be out of beta mode this month, providing parcel shipping services originating from the entire mainland United States and destined for all parts of the U.S. The company plans to launch its international service early in 2012.
EquaShip is the first and only carrier to offer U.S. Postal Service postal consolidation services to smaller shippers. Postal consolidation has become an increasingly popular method for major shippers such as Amazon to drastically reduce their parcel delivery costs and offer free shipping to customers.
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Ron Wiener
EquaShip
206-629-2211 104
Email Information

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