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Hundreds protest at MP offices of buyout firm

Original post made on Jul 18, 2008

Several hundred people showed up Thursday afternoon at the Menlo Park offices of the buyout firm, Kohlberg Kravis Roberts & Co., to protest what a spokesperson called "special perks and tax loopholes that buyout firms depend on to make billions."


Read the full story here Web Link posted Friday, July 18, 2008, 10:44 AM

Comments (11)

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Posted by Paul Losch
a resident of Community Center
on Jul 18, 2008 at 5:30 pm

This is an interesting example of how tangled the capital markets web is. Numerous pension funds, including those of CALPERS, SEIU and others, provide the investment capital that venture capital, private equity and buyout firms use to make the types of investments that they do.

Little is known about who the capital sources are for these firms. Often those whose pensions and 401K's are managed by various funds do not know or understand that part of their savings ends up with these firms. All they see is the return on their investment. The funds themselves have a fiduciary responsibility to provide the best returns on the capital they manage, within stipulated guidelines.

Numerous venture funds, private equity funds and buyout funds kick ass, and what does not get mentioned is that a number of them fail, and the funds and firms managing them fold. Most pride themselves on being shameless capitalists, and if there are tax advantages to be had, they do what it takes to make sure their investors get those advantages.

My general observation about all these funds is that they prosper when the investments they make grow, and for many of them right now, their investments are doing exactly the opposite. Think Chrysler, Linens 'N Things, the Tribune Company. All once public companies, now in private equity firms, and not doing well there either.

I will find fault with the fund managers who seem to do extremely well whether the funds they manage rise or fall. But the greed that this demonstration in MP today supposedly was about suggests to me a naive understanding of how investment money is put to work, and those doing the protesting may actually protest even more loudly if the funds in which they were invested provided lower returns due to avoiding the types of plays that the KKR's of the world make on behalf of many pensioners.


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Posted by Ron
a resident of Palo Alto Hills
on Jul 18, 2008 at 6:00 pm

Paul,

I don't know if you know the answer to this question, but here goes:

How many IPOs were done in the Silicon Vally, in the past quarter?

If your answer, like mine, is zero, what does this say about the business approach here?


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Posted by Paul Losch
a resident of Community Center
on Jul 18, 2008 at 6:15 pm

Ron,

I don't evaluate anything financial based on quarterly activity. The fact that you cite about how many IPO's took place last quarter to me is no more meaningful than were the reports a few years back when the number of IPO's each quarter set new records.

I neither condemn nor defend the funds that are the topic here. I merely point out that those who were protesting at KKR today, like many of us, have interests in these firms' investments that they may not understand are part of their retirement and insurance policies.

As I said, it is a very tangled web.


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Posted by Ron
a resident of Palo Alto Hills
on Jul 18, 2008 at 7:38 pm

Paul,

With respect, I think you may be projecting with your blinders on.

Silicon Valley has little to do with chips, anymore. Venture capital and their co-joined legal firms took the place of real production, for a while, but those days are over, too. The last gasp is real estate, buoyed by the rich, but that one is also in trouble, now.

My question for you, Paul, is what do you think is the next business model for this valley?


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Posted by Balance Sheet 101
a resident of Barron Park
on Jul 18, 2008 at 11:21 pm

Silicon Valley is becoming one of many nodes of innovation, worldwide. We're diminishing relative to many other regions, but we're fine in an absolute sense. Companies here have superb inter-networking relationships and open collaboration; good access to capital; a free-flow of hungry, talented immigrants that hooks us up to the rest of the world (by the late 1990s, Chinese and Indian engineers were running 29% of the Valley's technology businesses); a penchant for risk (without bailouts); etc.

I don't think there is a "next big thing" for the Valley. It's more likely that the region will survive as a key node in technology development, and grow along with other nodes.

About the protest at the buyout firm: what's really ironic about this is that the pension funds, etc. that pony up to build a VC fund, or a buyout firm (as Paul Losch has suggested) are often responsible for the loss of the very jobs that traditionally feed pension funds and other worker-supported revenue sources.

The leveraged buyout guys are the worst; I feel sorry for anyone working for Yahoo, now that Ichan is involved. Most of these guys go after a quick buck and damn the social consequences. What's even more aggravating is that the reason we see leveraged buyouts is usually because corporate directors get complacent (failing to grow and diversify, leading to huge dormant assets in a successful company), or are downright know-nothings who have networked their way to power. Fortune Magazine's covers are littered with current big name failures that are sucking on the tit of their golden parachutes, even as the workers they had responsibility for suffer painful displacement. there oughta' be a law.


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Posted by OhlonePar
a resident of Duveneck/St. Francis
on Jul 18, 2008 at 11:40 pm

Icahn may have blown it on Yahoo! Its two largest shareholders are publicly dubious about the deal. It would be strange if the damn deal failed after all this.


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Posted by Paul Losch
a resident of Community Center
on Jul 19, 2008 at 6:34 am

Ron,

I cannot respond to your "blinders on" assertion, I don't know what that means specifically.

I am not a Sand Hill Road guy, so my understanding is what I learn from friends and people I know who are. This place long ago abandoned being a hub of production, distribution and marketing. It is a hot bed of development and innovation, and will continue to be. I honestly believe that the best innovative thinking in the world is happening right here, and I also honestly believe that there is largely a limited talent pool for running companies that achieve substantial traction and face myriad challenges beyond the technology unerlying the business. There are exceptions, especially in Software, but even companies with HQ's here have their production elseewhere, and often their marketing and sales are distributed outside of this area.

So, to answer your question, I think the business model as it exists today is not going to change all that much. But those in the VC world have shifted their focus away from what we recall from the days of internet and before that software, and on to other things in bio-tech and green technologies.

Private equity firms (of which VC's are a sub-set) are often playing a useful role in helping small to medium size companies scale when they lack the capital and human resources to do it on their own. They also can take companies that have a change due to key people wanting to retire, due to a division that no longer is a strategic fit with the parent company, and other occurences that provide opportunity to some that are not available under an existing model. This is a great thing in the States, it is the capital markets working at their best, albeit on the "private" side, not the Wall St. side.

The buyout firms--as another posted suggested, a less pretty picture. I worked for Sam Zell for a while. He calls himself a "graveyard dancer," and has become a billionaire buying out distressed companies, slashing and burning, and putting them back up for sale. Zell's genius has been that he could see the underlying value in businesses that were largely masked by inept management or a major shift in the business environment or both. And he has the patience to wait things out until they are better for his investments. He paid me handsomely to fix some things when they were on a downturn, and when the opportunity came, he took that shiny thing I had done for him, sold it, laid me off, thank you very much.

Icahn is a prick. He tends to go after places where he thinks the management needs shaking up (cycle back to my comment above about the types of management capabilities we have in SV--Yang & Co. are a great example.) But what I observe about him is that he is not at all strategic about how to deploy the assets of his investments, he just follows his model that break it up, the parts are greater than the sum of them together.

Buyout firms are in trouble. They typically acquire existing businesses that are not fast growth, and have models that take the "inefficiencies" out of the business and unleash profits that were not noticed before. There also is an expectation of some growth. Not happening right now. I really would not want to be a case manager at Bain Capital, TPG, or the like right now.


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Posted by Anonymous
a resident of Another Palo Alto neighborhood
on Jul 19, 2008 at 9:48 am

I don't know what was the motivation of this protest. But I do question whether fees based on a percentage of money invested (not gains or losses) should be taxed as capital gains. It looks like income to me.


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Posted by Balance Sheet 101
a resident of Barron Park
on Jul 19, 2008 at 1:11 pm

anonymous, You are exactly right. Why does the private equity sector get away scott free on these earnings? Also, why aren't we taxing service sector businesses: consultants, accountants, attorneys, etc.?


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Posted by no more envy
a resident of Midtown
on Jul 20, 2008 at 6:19 am

Let me reverse the questions:

When are we going to learn that the more we tax, the less income flows into our federal and state coffers, and the poorer our poor get?

Quit practicing envy, which is to say calling for taxing everyone you think makes more than you do, and start practicing good sense.

This nation of "haves and have mores" is driving me crazy with its neighbor envy.


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Posted by Me Too
a resident of Meadow Park
on Jul 20, 2008 at 9:44 am

How private equity should be taxed is a valid question, NME, and one that private equity professionals debate among themselves. Management fees (getting paid a percent of capital under management, usually 2%) is definitely not return on risk - it is just a fee. So that certainly seems like ordinary income to me - no-one is suggesting taxing it "more," just the same as other ordinary income.

Most PE earnings come from carried interest, which is a percent (usually 20%) of the profit made. It is a fair question whether THIS is in fact cap gains, since the private equity manager has not put any equity at risk, s/he just earns a fee based on success - so his/her downside is zero, no different really from a sales commission (which of course is ordinary income).

Personally I think it would be a perfectly fine thing to tax carried interest as ordinary income. Importantly, it would not change the equation for limited partners (who supply virtually all the capital), and as long as there are LPs who want to invest there will be PE managers who will manage the investment for them.


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