Thursday, September 5, 2013

Two Public Pensions Wake Up To Problems at Caesar’s Entertainment

Two Public Pensions Wake Up To Problems at Caesar’s Entertainment

Caesar’s Entertainment Corporation, known best for its Harrah’s Casinos, has flirted with financial trouble every since being taken private by TPG and Apollo Global Management in 2008 in a $30.8 billion transaction.  Even after taking the company public again in a small offering in 2012, TPG and Apollo have struggled to deal with the company’s debt.  As a result, the investment has lost a great deal of value according to a number of Apollo’s institutional investors.
A Product Idea with No Support (2010)
Over the years, TPG and Apollo have extracted hundreds of millions of dollars in transactions and monitoring fees from Caesar’s, including $200 million when the transactions first closed and $30 million per year thereafter.   Transactions fees are charged to new portfolio companies in order to reimburse PE firms for arranging the deal.  Monitoring fees are charged to existing portfolio companies for keeping track of developments at the company. 

In the last few months, the Treasurers of Rhode Island and Oregon, Gina Raimondo and Ted Wheeler, have asked the private equity firms to share 100% of these fees with investors as a way of helping to recoup their investment and better align the interests of the general and limited partners.[1]  PE firms have a wide range of practices when it comes to these fees.  Some keep the fee entirely for themselves.  Others split the fee with their investors.  And still others agree with me that these fees are inappropriate.

Rhode Island’s and Oregon’s demand seems sensible given the poor performance of the investment.  There are, however, three problems with Rhode Island’s and Oregon’s request.  First, the limited partners, including the two aggrieved public funds, explicitly agreed to let TPG and Apollo take these kinds of fees on each deal in their respective funds.  In other words, the PE firms are merely doing what they said they would do in the partnership agreement.

Second, investors should be objecting to these types of fees whether they are taken from winning or losing deals.  PE firms are already receiving a hefty management fee of 1.5% to 2%, which ought to cover the very activities that are contemplated by transaction and monitoring fees.  I’ve written about these practices in “The Most Favored Passenger: Private Equity (January 11, 2013)” and “Quintiles Files to Go Public: The Details Matter (February 20, 2013).”  The bottom line is that these fees cost limited partners a great deal of performance and are unwarranted.

Third, it appears that the drive to question the transaction and monitoring fees originated with UNITE HERE, the union representing many of Caesar’s workers.  For some reason, both Oregon and Rhode Island have distanced themselves from UNITE HERE and claim that their demands were driven by their own analysis.  From what I’ve been able to discern, this issue wasn’t on anyone’s radar until the union starting meeting with pension plans.  If anyone deserves credit for raising the specter of unwarranted fees, it’s the union.


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