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May 6, 2020

DealBook: Private Equity Can’t Always Get What It Wants

14-18 minutes Source: NYT

Credit...Issei Kato/Reuters

Private equity firms have gone hat in hand to lawmakers to argue that their portfolio companies should get coronavirus assistance alongside Main Street companies. They’ve come up short in at least one big way, The Times’s Kate Kelly and Peter Eavis found.
A big sticking point is the “affiliation rule” for some lending programs, which essentially treats companies owned by a private equity firm as part of a conglomerate, rather than separately. This excludes them from aid based on company size. The main private equity lobbying group has tried to get an exemption.
Individual firms have also lobbied for help for their holdings. Carlyle, for instance, wants aid for troubled aviation companies — including three it owns that have applied for relief. One of them, PrimeFlight, said it had “not received any funding” yet.
Private equity has had some success. A big breakthrough was when the Fed expanded a $100 billion lending program known as TALF to accept most kinds of corporate debt, including many junk bonds, as collateral. The move came after Apollo presented an elaborate proposal to Jared Kushner, President Trump’s son-in-law and a White House adviser, and lawmakers.
Critics in Washington aren’t inclined to give them a break. Private equity firms “do fabulously well when their risky bets pay off, and they are the people arguably best positioned to absorb losses right now,” Bharat Ramamurti, a member of the congressional committee overseeing federal bailout efforts, told Kate and Peter.
It has been a somber earnings season, to say the least. A majority of big companies have now reported quarterly results and fielded questions from investors about what their future holds.
Profits are down, and worse is to come. S&P 500 earnings are on track to fall by around 14 percent compared with the first quarter of last year, according to FactSet. That would be the worst such decline since 2009, and pandemic shutdowns only began toward the end of the quarter. Analysts expect steeper declines in the second quarter (37 percent) and the third (20 percent).
Executives don’t know what’ll happen. It’s a time-honored tradition on Wall Street for companies to offer guidance on their future earnings. (Usually, these forecasts are just below the earnings the companies end up reporting.) Now, C.E.O.s are throwing their hands up: More than 100 companies in the S&P 500 stock index have scrapped regularly provided forecasts. Analysts are “flying blind,” one lamented to the FT.
So why are stocks up? The S&P 500 has risen nearly 30 percent from its March low all the same. Andrea Cicione of TS Lombard describes this as a “narrow recovery,” driven by the stocks of tech giants like Amazon that benefit from lockdowns. With so many companies withdrawing guidance, he says that bank earnings are the best forward-looking indicator — and that a huge spike in lenders’ provisions against bad loans “was an eye-opener.”
• John Authers of Bloomberg reckons that hopeful investors are “drawing the best possible conclusions” from earnings calls and discounting bad news.
Remember buybacks? Like a dispatch from a bygone era, companies’ first-quarter reports reveal how aggressively executives were buying back shares before the pandemic hit, with repurchases running 13 percent higher than the previous quarter, according to S&P.
• AlphaSense combed through the filings and calculated that 135 big companies (with a market cap of at least $5 billion) spent more than $40 billion on buybacks in March alone.
• Buybacks, dividends, overhead, capex and just about every other cash expense are now being cut, so second-quarter earnings reports will feel much more austere.
Giving your first big presentation in a new job is never easy. Bob Chapek’s first earnings report as Disney’s C.E.O. was particularly rough.
Disney reported a 90 percent decline in profit for the first quarter yesterday. One of Mr. Chapek’s first major acts as boss was to cancel the dividend, which will save $1.6 billion in cash.
When will theme parks reopen? Disney’s parks can be a bellwether for the broader economy, and their prospects are worryingly murky. Walt Disney World was closed for 17 days at the end of March, but it could remain shut for the rest of the current quarter (or longer). Mr. Chapek had “no projections” for when most parks would reopen, cruise ships would set sail or film and television production would restart.
• Shanghai Disneyland will reopen in mid-May, with the Chinese government capping capacity at 24,000 visitors a day, roughly a third of normal capacity. It would open far below even that, Mr. Chapek said, “to get our training wheels on” for temperature checks, mask requirements and other social-distancing measures.
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From his office in the White House, Jared Kushner bypassed veteran government relief officials and relied on a dozen young volunteers from professional service firms to obtain protective equipment. It didn’t go well.
The volunteers were largely twentysomethings from investment and consulting firms, according to The Times and The Washington Post. Their employers included Insight Partners; Welsh, Carson, Anderson & Stowe; Boston Consulting Group; and McKinsey.
Their “deal-making experience” was supposed to help “quickly weed out good leads from the mountain of bad ones, administration officials said in an interview,” our Times colleagues add.
That didn’t happen. “When I offered them viable leads at viable prices from an approved vendor, they kept passing me down the line and made terrible deals instead,” Dr. Jeffrey Hendricks, who has since sold supplies to hospitals in Michigan and elsewhere, told The Times. “It was bureaucratic cycles of chaos,” said a former volunteer who submitted a complaint to the House Oversight Committee.
The pandemic era is changing work in a lot of ways — including how often employers can check on their staff working at home.
The Times’s Adam Satariano tried out Hubstaff, one of the employee-monitoring software programs long used by finance and other industries. Adam let his editor, Pui-Wing Tam, see what his work day looked like. His conclusion, after Pui-Wing had the chance to see his sports news consumption and workout routines: “I trust Pui-Wing, but the monitoring systems have few safeguards to prevent abuse.”
• U.S. antitrust regulators approved AbbVie’s $63 billion takeover of its fellow drug maker Allergan. (Reuters)
• The retailer Lord & Taylor reportedly plans to liquidate its stores once lockdowns lift. (Reuters)
• Norwegian Cruise Lines raised $400 million from the investment firm L Catterton, but warned investors of “substantial doubt” about its future. (Norwegian, Business Insider)
Politics and policy
• The White House wants new tax cuts in future coronavirus aid packages, but lawmakers in both parties are reluctant. (NYT, WaPo)
• Airbnb will lay off a quarter of its workers and cut investments in nonessential operations. (WSJ)
• California officials sued Uber and Lyft, arguing that they are defying a state law that classifies their drivers as employees. (NYT)
Best of the rest
• The pandemic has caused a meltdown in the market for French cheese. (Politico)
• Off the menu at hundreds of Wendy’s restaurants: hamburgers. (NYT)

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