Wednesday, January 21, 2009

How Obama Could Shovel Billions to the Carlyle Group...

...ahem, to "save the economy"

The PEU Report has assembled some interesting data, from different sources, on the key elements surrounding the likely infrastructure portion of Obama's coming stimulus package (that Paul Volcker is now suggesting will be in the trillions). Let's put the data together to get a rough idea of how private equity, e.g. the Carlyle Group, may cash in on Obama's plan to save the economy.

1. According to WSJ, a report due out today, by a group including Morgan Stanley, Credit Suisse and the Carlyle Group says $180 billion of private capital is available for investment in highways, airports and other transportation infrastructure.

2. Such deals offer the prospect of steady, predictable profits for investors.

3. PEU says, Carlyle Group co-founder David Rubenstein bragged of their historical 30% annual return. Carlyle indicated a willingness to take less, but how much?

4. Which means, Carlyle is not going to take much less than 30%, if they can earn that on their funds elsewhere.

5.Business lobbyists also note that Obama supports the creation of a National Infrastructure Bank, which could leverage federal funds by pairing them with private investments.

So let's assume to make things simple that private equity only has $1 billion to invest and that they are willing to take a haircut on their normal returns--and put money into Obama's plan for only 25%.

Given that Obama wants to start a National Infrastructure Bank, the play could go down something like this. Private equity puts $1 billion into infrastructure, with loans (from Obama's new infrastructure bank)of $4 billion on top of this. (Though, no one really knows exactly,at this point, what the insiders are thinking in terms of leverage.) Lets say every dollar put into the project earns 5 cents on the dollar, with 4 to 1 leverage a billion earns $250 million annually--25%.

Now, keep in mind the real money available from private equity is reported to be $180 billion, add leverage at 4 to 1, and you have total money going into infrastructure stimulus alone of $900 billion. With possible annual earnings to private equity of $45 billion. No wonder Volcker is starting to talk trillions. Talk about crowding out the private sector---unless you work for private equity or get your rocks off smelling newly poured asphalt, your standard of living is going to take a dive.

Again, please note, these are just guesstimates, but the play is likely to come down in some manner of what has been outlined here.

As PEU says:

Greed and leverage imploded Wall Street. The big money boys haven't changed. They're looking for new suckers. The taxpayer is it. How bad can and will it get? A clue may come when the President's transparent government makes projected infrastructure profits public.

No comments:

Post a Comment