It is a common occurrence to hear of private equity buyouts these days. While some would like to place it entirely in a negative light, it can be beneficial for the business. Private Equity Firms such as Effi Enterprises may perform these types of financial activities to help recreate the business. There was a large number of leveraged buyouts (LBOs) that occurred in the 80s. It’s interesting to find out what triggered all of these buyouts and what the influencing factors were for their beginning and why they ended. It is also interesting to know the happenings after the companies were purchased. And what about the buyout firms; did firms like Effi Enterprises make any money?
At the very peak of the 1980s leveraged buyouts was Kohlberg Kravis Roberts’ purchase of RJR Nabisco. This buyout became the subject of a book written by two Wall Street Journal reporters, “Barbarians at the Gate.” It became a #1 bestseller in the New York Times. Later it was made into an HBO movie and was called by the same name.
The movie, Barbarians at the Gate retells the events that occurred during the largest leveraged buyout ever. James Garner plays RJR Nabisco’s Chief Executive Officer, F. Ross Johnson who is trying to buy out his own company. Much of the movie surrounds the power struggle between a Wall Street investment banker Henry Kravis and Johnson. Kravis wants to make Johnson take Nabisco over on his own.
It is a story of betrayal, high stakes and power struggles but told with great flair. It is well balanced with some lightheartedness and even playful tones at times. The movie gives us the chance to see a very different point of view of the behind the scenes goings on of leveraged buyouts. Rather than viewing these types of high profile financial transactions as an outsider with little understanding to what is actually going on in the company Barbarians at the Gate allows us to see it from the perspective of an insider. And in this case not just someone inside the company, but the man who sits at the top, the CEO.
It is sprinkled with dry humor, quite a bit of tension and subtlety. It’s a general look at a huge corporate game in which the losers all get $23 million – after taxes of course. The pace of the movie is great and this picks up nicely closer to the end of the movie as the story is building up to the climax. As the characters are all rushing around the audience is caught up in the energy of the moment, whether you already know how the story ends or not.
Screenwriter Larry Gelbart does an exceptional job of making F. Ross Johnson the protagonist. This is a difficult thing to do since he is a rich man who is deviously trying to get ahead of the game, this type of financial slight of hand that is despised by most. Mr. Gelbart is able to make Johnson into a rather likeable character in spite of his dealings. Of course he is made out to be someone who cares immensely for the company and the people and less for the money to be made. And Garner does a great job at playing a character which is mixed with humanity, greed, incompetence and good-naturedness. Kravis, played by Jonathan Pryce makes him out as more of a villain.
These were some very strong and captivating performances which opened up the world of F. Ross Johnson making it visible to the public eye. His morals are very much what is expected from the super wealthy are warped and the movie has several scenes which play this out nicely. The movie does a great job of presenting how he manages and even mismanages the buyout. It’s a high stakes game played between Kravis and Johnson and has all the drama that entails. And even though the vast majority despises such things as financial fakery that ends up with literally thousands of jobs lost, Barbarians at the Gate shares a perspective that is nothing less than thought provoking and entertaining.
There is no doubt that the world of finance needed an across the board overhaul from the small business to the entrepreneur all the way up to the largest of financial institutions. The Dodd-Frank Wall Street Reform Act was a broad piece of legislation which was created to help form and maintain financial stability. The intent was to create new organizations and rules on the federal level which will offer stricter oversight for most financial companies as well as the products that are sold by them. There are several key factors that are thought to be beneficial for the state of the financial world.
The Wall Street Reform Act created the Consumer Financial Protection Bureau (CFPB) which is responsible for educating consumers by creating documents and financial curriculum and making them available to the general public. The CFPB operates under the Federal Reserve and is able to create and enforce applicable rules for various types of financial transactions that consumers may engage in. This includes things like credit cards, home or car loans, payday loans and bank accounts. The intent is to protect the public from various types of scams while assuring the consumer that they will still receive quality financial services which are available and priced in a fair manner in every community. The CFPB provides constant oversight of various organizations such as mortgage companies, debt collectors and credit unions.
The new educational documents help clear up definitions for consumers. The goal is to clearly define financial topics such as penalties, fees, risks and credit scores. This offers an extra layer of protection for consumers since it is less likely that one who is informed will fall victim to frauds and scams. Consumers will also likely experience some changes to their existing accounts. Many banks have stopped charging overdraft fees and not honor payments made which will overdraw the account. Guidelines for qualifying for loans are more stringent, but when you do qualify for a loan you will be able to afford it. This may put pressure on different types of financial institutions to be more creative in order to make a profit. This will mean some new services for their customers, for an additional fee of course.
Insurance, Securitized Investments and Derivatives
Some of the complex financial products are regulated more uniformly for various risks. Financial and safety organizations are held responsible for risks. This means there is additional reviews conducted by the government to ensure product safety but this should make insurance more available in communities which have been underserved. Since the passing of the Dodd Frank Act, derivatives are treated closer to securities which require full disclosure of any involved risks as well as exchange trading which is centralized. Mortgage-backed securities and other creators of various securitized investments are required to maintain what is termed an equity stake.
New Indicators for the Economy
The government guarantees no bailout and those acquisition industries and traditional mergers must have a growth strategy and are now required to have an exit strategy. This restricts the size as well as the complexity of financial institutions. There are several new evaluation measures in place which prevent financial upheaval in larger companies which of course, has a wide range of economic repercussions.
This is simply a brief overview of the economic benefits that have been realized from the passing of the Dodd Frank Act. In one way it makes consumers be more hands-on with their own finances and for some this means that they now must hire a financial expert. The goal of this legislation was to provide protection for consumers by requiring higher standards of financial institutions. It puts much more information into the hands of consumers and makes financial institutions more accountable for their products and services.
Hedge Funds are types of partnership investment opportunities. Sometimes these are formed as a limited partnership or a limited liability company just in case the company goes under or bankrupt, creditors will not be able to try to get more money from the investors than the amounts they contributed to the hedge fund. These are a very risky type of investment which many shy away from while others flock to it. Some feel that the greater the risk the higher the return can be in the end. A hedge fund manager will use money that has been deposited with his company by investor and use it to invest in another company looking for a profitable return on the funds.
The main purpose of a hedge fund is to capitalize on the market and be able to make money whether the market is increasing or decreasing. This type of private investing is a way to sort of outperform the market. This type of private investing is not like mutual funds which are run by large public corporations; therefore they are not regulated by entities such as the Securities and Exchange Commission (SEC). This lack of regulations is what makes them be so risky, but is also one thing that makes them more attractive to investors. This is just one type of private investing opportunities which companies such as Effi Enterprises helps locate for start up businesses or struggling companies.
What does a manager do?
Managers of a hedge fund get compensated by earning a percentage of the returns. This is more appealing to many investors since they do not get just a “fee” as a return on their investment. The managers stand to make a lot more profit since the compensation structure can yield a return that is above market value. Without the standard types of regulations, hedge funds can yield a very high return; even though much of the investment is based on speculative results initially. Managers are excellent at using derivatives, like futures contracts or options. These allow a manager to bring in a profit whether or not the stock market goes up or down. Many times they have the option of selling the stocks short which basically means they can use a small amount of money as leverage and remain in control of large quantities of commodities or stocks. And they can select a particular time frame in which they will pay out. This means that they can use timing along with leverage to make a huge return if they correctly predict if the market is going to rise or fall.
New Regulations on Hedge Funds
Recently, there were some new regulations put into place regarding hedge funds. If the hedge fund is valued over $150 million it must be registered with the SEC. The Dodd-Frank Wall Street Reform Act which was enacted in 2010 set up a Financial Stability Oversight Council which watches for this type of private investing that begins to grow too large. Once it is deemed that they are “too large to fail” the Council may recommend the regulating of these funds by the Federal Reserve. The Dodd-Frank Act also set limits for how much a bank can invest in a hedge fund. Hedge funds can only be used by banks on behalf of customers and not simply to boost the corporate profits of the bank.
What happens if the investment is lost?
The hedge fund is very risky for investors. If the investment pays off everyone gets paid, but what happens if the fund loses money? Does the manager still get paid? Absolutely not; they will not get paid if there is a loss. The manager is somewhat protected while it is the investor that stands to lose. However this type of investment is protected from fraudulent activity but many feel that there are not enough regulations in place that can help protect the private investor.