Ethiopia, with cheap land and labour, has become a magnet for capital investing in the cut flower industry. Air freight to Europe is approximately half the rate of that from India, where cut flower cultivation has been expanding rapidly. Karuturi became number one globally in roses when it acquired the Dutch floriculture company. Another Indian flower company, Sher Agencies, recently acquired Mauritius-based Globeagro Holdings, which owns three Ethiopian companies employing some 1,000 workers: Alliance Flowers Plc, Holetta Roses PLc, and Oromia Wonders Plc.
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
]]>For the full IUF presentation (also available French, German, Japanese, Spanish and Swedish) click here.
In 2006 Sun Capital together with pe fund EG Capital Group, picked up five of Kraft's Canadian brands and manufacturing sites, now operated as CanGro Foods. CanGro immediately began selling off the brands and closing sites. In two years of private equity ownership, over half of the former union jobs at Kraft were eliminated. Outsourcing the supply of fruit for canning has also had a catastrophic impact on rural and agricultural income.
Earlier this year, Sun Capital acquired Canadian-based Timothy's World Coffee's parent company. Timothy's directly owns or franchises 166 coffeehouses and retail units, of which 77 are in Canada and 50 in the US. Timothy's also distributes single serve coffees and teas, and in September 2007 teamed up with Canadian Monogram Food Solutions Emeril's K-Cups line of high-end single-serve coffees. In April 2008, Timothy's signed a deal with Six Continents Hotels to supply these coffees to the parent company's Crowne Plaza, Hotel Indigo and Intercontinental brands. The deal was described by Timothy's head Leslie Chase as "Elevating the in-room coffee experience to an unprecedented level of ease, sophistication and luxury. Making the in-room experience on par with the other luxury appointments Six Continent's clientele have come to expect."
Sun Capital owns wholly or in part restaurant companies with over 2,200 locations and USD 3.4 billion in aggregate revenues, including Boston Market Corp., Bruegger's Enterprises, Fazoli's Restaurants, Friendly Ice Cream Corp., Garden Fresh Restaurant Corp., Real Mex Restaurants, Restaurants Unlimited and Souper Salad. In January 2008 it completed the USD 80 million acquisition of the 73-unit Smokey Bones chain from parent group Darden Restaurants, which had closed 53 units prior to the sale.
]]>According to the study, however, in private equity buyouts between €250-500 million, leverage has actually substantially risen. In the first quarter of 2008, debt to cash flow multiples rose to 6.8, as against an average of 5.8 for 2007. Purchase prices multiples also increased to 10.4 times EBIDTA compared with an average 8.7 last year. Cash available to companies taken private through leveraged buyouts for paying off their debt has fallen to 2.2 times their debt levels, compared with 2.5 in 2007 and 4 in 2003.
The conclusion? "Record levels of leverage in deals, rising purchase price multiples and the falling ratio of cash that companies have available to cover debt will make it harder for them to repay their loans and put pressure on default rates."
A convenient survey of recent US pe-banked bankruptcies can be found here. Among the pe-owned companies in the IUF sectors in the US which have recently filed for bankruptcy are the restaurant chains Vicorp Restaurants Inc., which will be closing 56 Village Inn and Bakers Square Restaurants, and Buffets Inc., the largest national steak restaurant chain. According to the report, the cookie maker Mrs. Fields Famous Brands is preparing to file for bankruptcy soon.
A May 31 article by Sinclair Stewart And Paul Waldie in the Toronto Globe and Mail (Feeding frenzy) describes how deregulation and the systematic exploitation of US regulatory loopholes have facilitated a recent surge in speculative investment in commodity markets, much of it by institutional investors including pension funds. The influx is one of the driving forces behind the hyperinflation of basic food staples.
"These funds", write the authors, "Have plowed tens of billions of dollars into agricultural commodities as a way to diversify their assets and improve returns for their investors. The amount of fund money invested in commodity indexes has climbed from just $13-billion (U.S.) in 2003 to a staggering $260-billion in March 2008, according to calculations based on regulatory filings. Michael Masters, a veteran U.S. hedge fund manager, warned a Senate hearing this month that this number could easily quadruple to $1-trillion, if pension funds allocate a greater portion of their portfolio to commodities, as some consultants suggest they are poised to do. Because agricultural markets are small - relative to stock markets - the amount of cash pouring in gives these funds substantial clout. Mr. Masters estimated that that these big institutional investors control enough wheat futures to supply the needs of American consumers for the next two years, and blamed the "demand shock" from these recent entrants to the commodities markets as arguably the primary factor behind the sudden take-off in food prices.
"If immediate action is not taken, food and energy prices will rise higher still," he told the hearing. "This could have catastrophic economic effects on millions of already stressed U.S. consumers. It literally could mean starvation for millions of the world's poor."
The authors trace the progressive loosening of regulatory requirements which has made possible the enormous influx of money, much of it fleeing the meltdown in the market for mortgage-backed securities and the wider fallout, including big leveraged buyouts.
"Beginning with the energy market, regulators made a series of far-reaching decisions that gradually loosened oversight of complex commodity derivatives and created loopholes for large speculators, allowing them to trade virtually unlimited amounts of corn, wheat and other food futures."
The key breakthroughs for investors came in the energy futures market, establishing general precedents for all commodity trades (including food). In 1989, the US Commodity Futures Trading Commission (CFTC) issued a policy paper declaring that it would not regulate "swap deals" - commodity purchases involved financial intermediaries (typically banks) and the dealers. This was followed by a 1990 declaration by the CFTC that it would consider oil trading on the Brent Market as "forward contracts" (a contract in which the buyer ultimately takes delivery of the commodity) rather than "futures contracts" (in which the buyer rarely takes delivery, but uses the contract for purely speculative purposes). Futures contracts had traditionally been regulated, in order to curb speculation and volatility in key markets; forward contracts are not regulated. The ruling meant that oil futures trading was to be treated as outside the scope of CFTC regulation.
"The CFTC's embrace of a narrow definition of a futures contract built on the regulator's earlier promise that it would not police swap transactions. Together, these moves opened up a new frontier of commodity trading, enabling financial speculators to buy and sell complex derivatives away from the prying eyes of regulators and exchanges."
Expanding beyond the energy market into other commodities, institutional investors began diversifying into food. As the authors describe the chronology of deregulation, "It wasn't long before this infusion of money hit another regulatory snag. For almost 75 years, the CFTC has imposed limits on how much of certain agricultural commodities, including wheat, cotton, soybean, soybean meal, corn, and oats, can be traded by non-commercial players - that is, investors who are not part of the food industry. So-called "commercial hedgers," like farmers or food processors, can trade unlimited amounts in order to manage their risk."
"The limits were designed to prevent manipulation and distortion in what are relatively small markets, and at the same time to allow for a small amount of speculative activity, in order to provide liquidity for trading.
"For decades, the restrictions didn't pose much of a problem. And then, in 1991, as new money began pouring in, the playing field suddenly shifted.
"Emboldened by the CFTC's laissez-faire approach, a bank approached the regulator and, for the first time, requested an exemption from speculative trading limits in an agricultural commodity.
"The unnamed bank was acting as a "swap dealer" for a pension fund: Essentially, it was a middleman who helped the pension fund get exposure to commodities. A spokesman for the regulator declined to identify the bank or the pension plan, citing confidentiality requirements."
The CFTC granted an exemption, ruling through a particularly tortuous logic that the swap dealer was for practical purposes no different than a food industry "commercial hedger", and therefore exempt from regulation - and regulatory limits on the size of the investment. The decision, however, was a one-time affair rather than a change in the rules. Investors need assurance that the exemption would become precedent, so in 1992 Congress passed legislation empowering the CFTC to determine what kinds of derivatives could be treated as forward contracts. Regulation was further loosed through new legislation in 2000 which established new exemptions, including virtual trading in energy futures contracts - the "Enron loophole".
Freed of regulatory limits and requirements, pension funds increasingly turned to food commodity markets, The Ontario Teachers' Pension fund, which began with a modest investment in 1997, now has some USD 3 billion invested. With rising investor activity and increasing demand, prices became to rise: "Between 2000 and 2007, the price of wheat increased 147 per cent on the Chicago Board of Trade. Over the same period, corn increased 79 per cent and soybeans 72 per cent. In the past year, in particular, the price moves have been dramatic. The CFTC's moves to deregulate the sector, meanwhile, only inspired calls for more deregulation. As more funds piled in, stoking demand for agricultural futures contracts, speculators began clamouring for more flexibility with trading limits."
Always eager to abandon its mandate of regulating in the public interest, the CFTC in 2005 expanded trading limits on the amount of wheat, corn, oats and soybeans that traders could buy or sell at any one time on the futures markets.
In 2006, Deutsche Bank and an (undisclosed) fund asked to be exempted from all trading limits. The regulatory authorities assured them that there would be no penalties for exceeding the limits.
More recently, the CFTC has proposed full regulatory exemption for index and pension funds, which would allow them to invest directly In the face of rising criticism, the same arguments produced in defense of the buyout binge are being adduced: the funds are "bringing liquidity" to the market, and generalizing risk.
From another point of view, it has been estimated that every percent point increase in the price of food pushes an additional 16 million people into hunger.
In its briefing paper for the World Food Summit held June 3-5 in Rome, the FAO devoted two perfunctory paragraphs to the influence of financial markets in pushing upwards the cost of staple food commodities in its "assessment of recent developments", and had nothing to say on the matter in its concluding "policy options". Regulating financial markets, it seems, is not a policy option in the face of mass starvation.
The acquisition forms part of growing transnational penetration (including private equity) of the regional beverages market. In April, Coca-Cola Hellenic purchased Russia's drink-maker Aquavision, whose brands also include Botaniq juice. PepsiCo last year paid USD 542 million for Ukraine's fruit juice company Sandora.
Lion Capital bought out the UK cereal maker Weetabix for GBP 640 million in November 2003, picked up Orangina (together with Blackstone), the former European beverages division of Cadbury Schweppes, in February, 2006 and in August of that year bought Kettle Foods, the market leader in both the US and the UK for organic potato chips. Last year, Lion Capital defeated a T&G organizing effort at Kettle Chips by employing the notorious US union-busters Burke Group.
]]>"The food crisis is closely linked to the financial crisis", said Hannes Swoboda, vice-president of the Group. "It is outrageous that some banks are inviting their clients to speculate on rising food prices. One of our amendments calls for a Europe-wide ban on such speculation. We also want the European Commission to examine the powers of national supervisory bodies to ensure that they can guarantee stable and secure markets and that speculation does not violate the right to food."
More information and a link to the text of the motion are available here.
The report is available online at www.behindthebuyouts.org.
]]>The recent infusion of SWF money into major global investment banks in the wake of the sub-prime crisis has highlighted their new role as "mainstream" financial actors. Concern about SWFs has to date been largely expressed in terms of threats to national ownership of politically or economically "strategic industries", loosely and variously defined as ranging from infrastructure (e.g. US ports) to the French food TNC Danone; loss of control over supplies of raw materials; heightened potential for international financial instability, as major investors acquire/divest assets with no regulation or transparency; and the potential subordination of corporate governance to questionable, even hostile political agendas.
SWFs have recently taken large stakes in public stock exchanges, major manufacturing, service and infrastructure transnationals, and thrown a lifeline to private equity funds searching for "permanent money". In addition to the Chinese SWF stake in Blackstone, for example, two Abu Dhabi government investment entities have taken large stakes in Apollo and Carlyle. The funds have also been operating aggressive buyout operations of their own.
Estimates of the size, portfolio composition and investment strategies of the SWFs vary enormously, highlighting the total lack of transparency at the heart of their operations. Estimates for the assets under management of the Abu Dhabi Investment Authority, for example, the largest SWF, range from USD 500 billion to 875 billion; for the Singapore Investment Corporation from USD 100 billion to 330 billion. Estimates of their portfolio composition are simply guesses.
The OECD estimates the total current global SWF wealth at ca. USD 2.4 trillion. This compares with some USD 1.6 trillion attributed to global hedge funds, though this figure is also a guess.
Comparison with the assets under management by private financial corporations is instructive. According to the United Nations Commission on Trade and Development (UNCTAD), whose most recent ranking of the top 50 financial TNCs dates from 2004, each of the top 10 had assets under management of well over USD 1 trillion (e.g. UBS 1.73, Citigroup 1.48 trillion, etc.), dwarfing even the largest SWF.
Morgan Stanley has predicted that by 2015, foreign reserve-based funds like those of China and Singapore will have caught up with today's leading commodity-based funds, and that both classes will dispose of assets on the order of USD 6 trillion. This again is a guess based on fragile suppositions.
All available evidence, however, points to a general and pronounced shift of SWF investment into equity and into "alternative assets" – hedge funds, private equity and real estate. Apart from sensitive political issues, these investments bear directly on employment, and require direct engagement by unions.
The transparency/governance issues raised by SWF investments are similar to those raised by private equity and hedge fund investments. TUAC has sensibly proposed that from this point of view SWFs not be treated separately from other unregulated pools of global financial capital in proposals for greater regulation.
For unions organizing workers in companies in which SWFs threaten to acquire significant or total control, the issues are also similar to those confronting unions faced with a hedge fund incursion or private equity takeover: gaining access to information about investment/employment plans before and under the acquisition, maintaining continuity of employment conditions/union rights and recognition, establishing employer responsibility and accessibility and securing long-term investment in the future of the company.
The failed bid for UK supermarket chain Sainsbury's by the Qatar Investment Authority, which ultimately floundered when pension fund trustees insisted on the buyer meeting stringent pension fund reserve requirements, can serve as a positive example of successful union action in this situation.
This year's second annual PEI ranking of the 50 largest buyout funds, based on funds raised over the past 5 years, shows an aggregate USD 810 billion in funds raised, a considerable increase over the total USD 551 billion contained in the 2007 rankings. Leverage that by a conservative multiple of 3, for example, and workers arer confronted with over USD 2.4 in concentrated buyout power.
The 2008 rankings show 11 new funds on the list, while 11 have disappeared from the league. All but one of the firms (Carlyle, which remains number 1) changed position with respect to the previous year's rankings. Here is the list - the number at the end indicates the 2007 ranking. Click here for the executive summary of the full report.
Top 50 Buyout Funds Ranked - 2008
1 The Carlyle Group Washington DC $52 billion 1
2 Goldman Sachs Principal Investment Area New York $49.05 billion 3
3 TPG Fort Worth (Texas) $48.75 billion 5
4 Kohlberg Kravis Roberts New York $39.67 billion 2
5 CVC Capital Partners London $36.84 billion 10
6 Apollo Management New York $32.82 billion 12
7 Bain Capital Boston $31.71 billion 8
8 Permira London $25.43 billion 6
9 Apax Partners London $25.23 billion 7
10 The Blackstone Group New York $23.3 billion 4
11 Warburg Pincus New York $23 billion 14
12 3i Group London $22.98 billion 13
13 Advent International Boston $18.32 billion 43
14 Terra Firma Capital Partners London $17 billion 15
15 American Capital Bethesda (Maryland) $17 billion 23
16 Providence Equity Partners Providence (Rhode Island) $16.36 billion 9
17 Silver Lake Menlo Park (California) $15.6 billion 19
18 Cerberus Capital Management New York $14.9 billion 34
19 AIG Investments New York $14.22 billion N/A
20 Fortress Investment Group New York $14.0 billion 27
21 General Atlantic Greenwich (Connecticut) $13.3 billion 18
22 PAI partners Paris $12.98 billion 35
23 First Reserve Corporation Greenwich (Connecticut) $12.82 billion 22
24 EQT Partners Stockholm $12.47 billion 21
25 Hellman & Friedman San Francisco $12 billion 16
26 Cinven London $11.93 billion 11
27 Bridgepoint London $11.7 billion 36
28 Clayton, Dubilier & Rice New York $11.38 billion 47
29 Teachers’ Private Capital Toronto $10.69 billion 20
30 Charterhouse Capital Partners London $10.52 billion 24
31 Lehman Brothers Private Equity New York $10.22 billion 25
32 Thomas H. Lee Partners Boston $10.1 billion 30
33 BC Partners London $9.26 billion 29
34 AXA Private Equity Paris $9.24 billion N/A
35 NGP Energy Capital Management Irving (Texas) $8.84 billion N/A
36 Oaktree Capital Management Los Angeles $8.4 billion 49
37 Marfin Investment Group Athens $8.15 billion N/A
38 Sun Capital Partners Boca Raton (Florida) $8 billion 28
39 Doughty Hanson & Co. London $7.44 billion 37
40 JC Flowers & Co. New York $7 billion N/A
41 TA Associates Boston $6.83 billion 39
42 Eurazeo Paris $6.75 billion N/A
43 New Mountain Capital New York $6.69 billion N/A
44 MatlinPatterson New York $6.67 billion N/A
45 WL Ross & Co. New York $6.65 billion N/A
46 EnCap Investments Houston $6.58 billion N/A
47 Madison Dearborn Partners Chicago $6.5 billion 32
48 Barclays Private Equity London $6.43 billion N/A
49 Onex Toronto $6.17 billion 33
50 Welsh, Carson, Anderson & Stowe New York $5.88 billion 42
Much of the debt comes from the buyout funds' own deals, including the Apollo/TPG Harrah's buyout, the largest private equity casino deal ever. According to the Times article of April 9, "Loans that supported buyouts by other private equity firms, like the takeover of First Data by KKR, are also expected to be included in the package", with Apollo buying half the debt and Blacksone/TPG splitting the rest.
Virtually all sizeable private equity firms have been successfully raising multi-billion dollar funds since the early days of the crisis to speculate in LBO debt. Leon Black of Apollo told the annual super Return Conference in Germany in February "You can get equity-type returns from debt instruments that may be a better play than pure equity right now, where you can't get leverage."
According to the April DowJones Private Equity Analyst, reporting on KKR's plans to soon launch a leveraged debt hedge fund, "All of the biggest buyout firms soon will be active in hedge funds, either directly or through joint ventures. But smaller players such as H.I.G. Capital Management, New Mountain Capital LLC and Quadrangle Group are looking for a piece of the action, too – albeit more quietly. Unlike the big guys, who are mostly answering investor demand for a ‘onestop shop’ for alternative investments, the mid-market players are simply seeking to put information garnered in the course of everyday due diligence and portfolio management to work in new and creative ways. There are many ideas and potential investments that arise during the course of our business that fall outside of our views of a PE fund,” said Kevin Callaghan, managing director of mid-market buyout firm Berkshire Partners, which occasionally takes stakes in publicly traded companies. “How can we take those ideas and put them to work?”
According to the same Dow Jones report, US private equity firms raised almost one third more money in the first quarter this year than in the same period in 2007 - USD 58.5 billion vs. 44.9 last year. Fundraising for buyouts, however, fell sharply as a percentage of overall fundraising - USD 27.6 billion in 32 funds, as against 35.2 billion in 34 funds in 2007.
As noted in an article on this site published on October 1,2007, "The emergence of massive funds specializing in LBO debt (one hedge fund has already raised USD 7 billion) raises fundamental regulatory issues. The investment banks who have been collecting the fees and securitizing and peddling the debt to fund buyouts now find themselves unable to offload it, except at a heavy discount, to the very funds whose buyouts created the debt in the first place. Picking up heavily discounted buyout debt could bring massive rewards to funds who lost out in bidding wars which drove purchase prices to ludicrous earnings multiples – and leave them in possession of the company in the event of a default. All the classic conflict of interest issues raised by the buyout process are magnified and intensified here."
The text of the presentation is available on the European Parliament website here .
The FT gives the examples of Spain's clothing retailer Cortefiel, Irish telecom company Eircom (into its second round of financial pillage) and Germany's plastics company Klöckner.
But there are more. Exactly how many more cannot be determined, any more than the securitized debt trail can be fully traced. One indication of the extent of the contagion is a recent report from Standard & Poors's which maps the corporate default threshold. According to the study, the number of "weakest links" - companies closest to default on their financial obligations - stood at 114 on March 10, with 93 of them in the US. In June 2007, the comparable number was 62, rising to 77 in December.
Of the 93 US "weakest links", over half were involved in private equity transactions. Standard & Poor's finds the results "not surprising", given that companies taken private through an LBO depend on taking on additional debt to deliver returns to investors. "The default risk exposure may be magnified this time around, because current market conditions have constrained the typical exit options afforded to sponsors", observe S&P. That is to say, the "exit" door is currently blocked, consigning the acquired companies to longer private equity ownership - a point emphasized by the IUF at the onset of the credit crisis.
Another recent study by FridsonVision, discussed in the Wall Street Journal on January 25, looked at 220 private equity deals between 2002 and 2007, and found the level of "distressed" debt to be 29%, including bonds and loans, compared with a level of 19% in the Merrill Lynch high yield index. The study also found widely varying levels of distressed debt between the various buyout firms, with Thomas H. Lee Partners (47%), Apollo Management (42%) and Bain Capital (42%) scoring at the top.
S&P and Moody's both predict a substantial increase in the default rates for LBO-related debt.
The story, however, doesn't stop there. Debenhams was relisted in May 2006 at a price of GBP195p per share. With the public offering, the buyout funds tripled their initial investment. Following the initial public offering, TPG retained 14 percent of the shares, CVC 9.7 and Merrill Lynch 8.5.
With over GBP 1 billion in debt still on the books, Debenhams has struggled, and has struggled even harder in the face of a consumer spending downturn. Merrill Lynch sold some 2-3 percent of its holding last year, and on March 26, 2008 sold its remaining shares - at 60p per share, for GBP 28.4 million, compared with the GBP 103 million it was valued at following the IPO. In a classic case of thieves falling out after the big haul, Merrill Lynch gave no warning of its plan to dump the shares to its erstwhile buyout partners - both of whom retain seats on the Debenhams board. According to the Financial times, the Merrill sale "came as a shock" to TPG and CVC.
The real lesson, buried in the FT article, is this: "Merrill - along with the other buy-out firms - has made a handsome return on the investment regardless of the share price performance following the float [our emphasis - IUF] The three private equity firms made more than three times their collective initial £600m equity investment in less than three years." Company shares fell by 17% immediately following Merrill Lynch's exit.
Now is a good time for someone - say, the UK Venture Capital Association, or TPG chief David Bonderman - to explain to Debenhams' workers the familiar virtues of a leveraged buyout: longterm investment, superior management and better alignment of the interests of management with investors.
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