The IUF's Private Equity Buyout Watch

Gobal fund manager Schroders is launching an Agricultural Land Fund, only months after closing its USD 6 billion Alternative Solutions Agriculture Fund due to excessive investor demand.

Alternative Solutions, investing in grains, livestock, coffee, sugar, equities and financial instruments, had returned close to 50% since its launch in October 2006. In January this year, over 56% of the fund was allocated to commodity futures. "We closed the fund", a Schroders' spokesperson was quoted telling the UK press, "so that its performance objectives were not compromised by its size. Although capacity in the agriculture futures markets has increased from USD 40 billion to 200 billion in the last six to 12 months, it has not kept pace with investment demand for soft commodities."

The new fund, to be listed on the London Stock Exchange in September, will target global agricultural land and land related industries through investment in private equity companies, farm management businesses and related funds.
Approximately 25 per cent of the investment will be in agricultural land-related equities and commodities.

Along with food commodity futures, agricultural land around the world has become a new magnet for speculative financial flows. In the US, despite the housing property crisis, soaring farmland values riding the ethanol boom have generated new investment vehicles and increased participation in existing vehicles by institutional investors. "The last six months I've definitely gotten a lot more calls from private equity managers and hedge funds", said the head of Hancock Agricultural Investment Group over a year ago. The fund's clients are exclusively pension funds and other institutional investors.

The influx of financial investment into agricultural land is global. Last month, Netherlands-based agrifood giant Louis Drefyfus Commodities raised USD 65 million for Aclyx Agro Ltd., its new.vehicle established to buy, operate and sell land in Latin America (chiefly Brazil). The funding is principally from Dreyfus' own commodity fund and from AIG Brazil Special Situations Fund II, a Latin American private equity arm of the NYSE listed AIG Investments (American International Group) which was recently closed with US $691.9 million in investor capital.

According to the May 12 announcement by the Latin American Venture Capital Association, "Calyx Agro plans to capitalize on the region's growing agribusiness sector and potential for farmland appreciation by acquiring land that is presently operating with low technology or used for livestock breeding. In turn, the company will seek to improve production yields, which is expected to ultimately drive a higher resale value of the land.
"We believe that productive farmland will continue to be in high demand driven by the world's growing appetite for agricultural commodities and Latin America's competitive position in global trade," said Ana Vigon, Managing Director and Head of Latin America Private Equity at AIG Investments.

"The investment in Calyx Agro will be AIG Investments' fourth in the Latin American agriculture sector, following investments in Falcon Farms, a premiere grower and distributor of fresh cut flowers with production based in Colombia, Ecuador, and Mexico, Frigorifico Mercosul, a leading Brazilian beef processor, and Fertilizantes Heringer, one of the largest fertilizer distributors in Brazil."

The LAVA press release contains the following capsule summary of Dreyfus, one of the oldest privately-held global processors and grain traders: "Louis Dreyfus Commodities, one of the world's leading commodity merchants and processors of agricultural products, has merchandised and traded bulk commodities in international markets since 1851. Louis Dreyfus Commodities owns or operates considerable industrial assets around the world to conduct its global trading and merchandising activities. As a result, Louis Dreyfus Commodities is consistently ranked as one of the world's largest merchandisers of grains and oilseeds, is one of the three world's largest producers of orange juice (15% global market share), is the third largest producer of sugar in Brazil, the world's biggest exporting country, and is the largest trader and merchandiser of raw cotton in the world. The company is also a leader in the coffee, rice, metals and freight markets. Louis Dreyfus Commodities has an emerging worldwide presence in the expanding biofuels sector, including a leading position in the Brazilian ethanol market. Louis Dreyfus Commodities operates from five major regions (Argentina, Brazil, North America, Europe and Asia), and offices in Beijing, Buenos Aires, Delhi, Geneva, Sao Paulo, Singapore and Wilton (USA) serve as major coordination centers for merchandising activities. Louis Dreyfus Commodities is an affiliate of the Louis Dreyfus Group, an organization of diversified companies privately owned by the Louis-Dreyfus family. The global activities of Louis Dreyfus Commodities are vertically integrated under a holding company, Louis Dreyfus Commodities BV, which is based in the Netherlands."

Private equity investment in South Asian food processing and agricultural land, previously focused on India (see "Buyouts Bomming in India's Food Processing Sector"), has now widened into Pakistan. According to a May 13 report in the Financial Times, "One of the Middle East's largest private equity companies has been quietly buying farmland in Pakistan as part of plans by the UAE to increase food security and to dampen inflation. Dubai-based Abraaj Capital says it is working with the UAE government on the strategic agribusiness investments in Pakistan.

"The government in Abu Dhabi has been holding talks with Islamabad about a framework for investment in its agricultural sector as it seeks to secure cheaper long-term supplies of basic foodstuffs such as wheat and rice."

Posted on July 8, 2008 11:57 AM | Permalink

The collapse and bankruptcy of Buffets, Inc. - the largest chain of buffet-style restaurants in the US which at one time employed over 36,000 workers - provides an object lesson in how private equity owners can get their cash out quickly through dividend recapitalizations, suffocate a business to the point of bankruptcy under accumulated debt… and still turn a profit.

Two private equity funds - CI Capital LLC and Sentinel Capital Partners - took Buffets private in 2000.

At the time, CI Capital on their website described the deal in these terms:

Buffets, Inc. currently operates approximately 393 restaurants throughout the U.S. of which 236 operate under the name Old Country Buffet and 131 under the name HomeTown Buffet. The company has 27,000 employees nationwide, sales of approximately $930 million and serves approximately 154 million meals per annum. The buyout of Buffets was named “Public-to-Private Deal of the Year” by Buyouts newsletter. In October, 2000, Caxton-Iseman acquired and took private Buffets, Inc. (Nasdaq: BOCB) for $645 million.

In June, 2002 we completed the refinancing of Buffets Holdings, Inc., the parent company of buffet-style restaurant chain Buffets, Inc. In connection with the recapitalization, the Company made a $150 million distribution, on $130 million of original equity invested in the Company.

According to a July 7, 2008 article in the internet publication The Deal, Frederick Iseman, president and managing partner of Caxton-Iseman, explained at the time, the debt markets "came to understand that we are not in business to invest $130 million and take out $142 million after 20 months but rather to invest in building future revenues and profits as the basis for a large future capital gain."

The USD 525 million recap was arranged by Credit Suisse Group. The Deal describes what came next, two years later:

Encouraged by robust credit markets, Buffets launched a second leveraged recap in January 2004, allowing the sponsors to collect another $75 million in dividends, according to Sentinel's Web site. CI Capital, which holds 77% of the common, took the lion's share.

Buffets private equity owners decided to expand when an initial attempt to sell the company failed in 2005. Despite heavy leverage, Buffets bought out Ryans, a rival chain, in 2006, creating a nationwide chain of restaurants with over 36,000 employees. The acquisition was partially funded by the USD 566 million sale/leaseback of 275 Ryans and 7 Buffets restaurants to Fortress Investment, where Al Gore served as an adviser.

And then? According to a Moody's source quoted by The Deal, "The costs associated with the acquisition, with both higher rent expenses and higher leverage, resulted in a liquidity crunch." With revenues down, like many another leveraged private equity portfolio company, the pe-owners couldn't make the payments on their high-interest unsecured loans, and the company filed for bankruptcy.

But the real lesson is this: even assuming that the owners extract not a penny of equity from the bankruptcy proceedings, the two funds have earned a 1.7 multiple on their initial investment - not bad for destroying an enterprise which at one time provided a workplace for 36,000 people.

Posted on July 7, 2008 03:00 PM | Permalink

Massive use of high-risk debt, aggressive restructuring, asset stripping, "quick flips" and the systematic exploitation of tax loopholes (many of which their lobbying efforts have inspired) - these are the tools behind the enormous profits raked in by private equity, or leveraged buyout funds. Workers, public revenue and the public interest generally are the big losers in these financial engineering operations. One of the oldest and biggest of the funds is the US-based KKR - Kohlberg, Kravis, Roberts & Company - the "barbarians at the gate" behind the USD 31 billion buyout of RJR Nabisco which effectively destroyed the company and led to the loss of an estimated 40,000 union jobs.

KKR did more and bigger deals than any of its competitors in 2007, and currently has earmarked some USD 20 billion for global acquisitions. Its vast and diversified portfolio of companies includes major manufacturing, media and service corporations around the world.

In a paper written for the ILO in 2006, the IUF drew attention to the growing significance of financial investors as transnational employers and the challenges this poses for traditional collective bargaining strategies:

If these private-equity funds were recognized as TNCs (given their extensive control over manufacturing and service companies globally) and included in UNCTAD’s top 100 non-financial TNCs, they would easily displace the top 10 corporations. Even UNCTAD’s new list of the top 50 financial TNCs (included for the first time in the World Investment Report 2004) only examines financial TNCs in terms of a narrowly defined financial service sector and limits employment data to that sector.This neglect of the role of investment trusts as employers is also evident in the ILO’s World Employment Report series. The World Employment Report 2004-05 explores the impact on productivity of labour and capital mobility, and the relationship between employment stability and productivity, without taking into account the financial imperatives that drive this flexibility and the growing impossibility of employment stability in a financialized world.

KKR in 2008 owns 35 companies with a combined $95 billion in annual revenue and more than 500,000 employees worldwide. Considered as a global corporation, KKR would rank tenth in the global Fortune 500.

To highlight the destructive impact of private equity buyouts and the need for action to ensure respect for trade union rights and equitable tax treatment of private equity-owned companies, the IUF-affiliated SEIU has organized a global day of action on July 17 targeting KKR, including actions and demonstrations in cities around the world.

SEIU has prepared background material on KKR, sample leaflets, and a video. To learn more, and to see how your organization can participate, go to by http://www.july17action.org/

For more information on events in your city/country, contact jessica.champagne@seiu.org

Posted on July 2, 2008 01:29 PM | Permalink