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Posts Tagged ‘Partnership’

In order to understand Robert Mercer’s brilliant financial engineering,  let’s begin our analysis using three outstanding local Portland beers.  They are Rogue Brewery’s Shakespeare Stout, Widmer’s Hefeweizen and Deschutes Breweries Fresh Squeezed IPA.  All are distributed by Portland based Columbia Distributing, one of the nations largest beer distributors, which was purchased by the Jim Simons controlled investment fund Meritage in 2012.  Simons along with Robert Mercer are Co-CEO of the $100 billion Rentec hedge fund.

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This analysis will unravel the relationship between Rentec’s Medallion fund, its company retirement plan,  the Meritage private equity fund, which purchased Columbia Distributing in 2012, and numerous tax exempt foundations including those of Jim Simons, Nat Simons and Robert Mercer.

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Today Oregon PERS approved a $400 million investment in Stonepeak, a firm that invests in “infrastructure projects.”

In his presentation Stonepeak’s managing director Michael Dorrell noted their strategy is to invest in “essential infrastructure assets with an economic monopoly, much like an airport.”  This includes water, power plants, transportation and telecom with a focus “outside the auction process.”  They expect an annual return of 12 percent over 30 years.

One of their major projects he discussed is the largest desalination operation in the western hemisphere, in Southern California.  The key development partner is Poseidon Resources, “former GE guys.”  Dorrell noted they obtained the exclusive rights to such desalination projects.  They brought these rights over from their former employer Blackstone, who is entitled to 50 percent of the carried interest from this project. The expected return is 14 percent over 30 years and the City of San Diego could not do much about this high rate since Stonepeak has rights to the “only viable site near San Diego.”

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In a front page story Sunday May 20, 2012, Ted Sickinger of the Oregonian provided a detailed review of private equity valuation concerns.  This portfolio of opaque investments has grown substantially and poses unique risks to Oregonian PERS participants.  In his article, Sickinger notes this analysis is based upon original Parish & Company research.

Although an excellent article, there was still no mention that Oregon PERS does not keep independent records of “carried interest” fees paid to the private equity general partners nor K-1 annual partnership statements summarizing activity.  These private equity firms include Blackstone, KKR and Fortress. The fees cited in the article are for “management” and do not include the carried interest fees which are typically 10 times the annual management fee.

It is indeed remarkable that the Oregon State Treasury does not maintain these independent records.

Here is a link to the story:  Oregon PERS: Private equity investments pose unclear future

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Pulitzer Prize winning reporter and senior editor Mark Maremont of the WSJ wrote the following two stories, explaining how Presidential Candidate Mitt Romney built his IRA to as much as $100 million. Both stories were based upon original Parish & Company analysis.  The purpose of this analysis is not to directly disparage Romney but rather note that his conduct with respect to this scheme is worthy of discussion.

1) Bain Gave Staff Way to Swell IRA’s by Investing in Deals, Wall Street Journal, March 28, 2012

2) Bain Capital’s Unusually Young Retirement Rollover Age of 23, Wall Street Journal, April 2, 2012

The reason these stories are significant is that during Presidential Candidate Mitt Romney’s tenure at Bain, employees were able to use a special scheme, outlined in detail by Maremont of the Wall Street Journal, to put undervalued Bain related partnership investments into their SEP-IRA accounts, thereby going far above annual contribution limits afforded other taxpayers.   Some argue this is aggressive financial engineering while others argue it is outright tax fraud.  At a minimum it certainly has ignited a debate regarding fairness.

When Romney first ran for President in 2008 the law firm that handles his blind trusts, Ropes & Gray, also crafted a new pension plan for Bain Capital. Unlike the previous plan, the new plan allows the firm to hide the same scheme set up by Romney.   The problem is that this appears to be garden variety tax fraud in clear violation of important retirement plan rules.  A fraud enabled by one key provision, an official retirement rollover age of 23.

Bain’s use of an official retirement age of 23 essentially allows all existing employees, each year, to act as if they are doing a retirement related rollover from their profit sharing to IRA accounts outside the ERISA regulatory umbrella.  Of course, if I or most businesses had 23 as an official retirement age the IRS would laugh and shred the plan. (more…)

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Note:  Mitt Romney Tax Return Analyzed in Separate Post

As an investment advisor I have found reviewing a company’s pension plan to be a good indicator of the sponsoring company’s quality of management.  These pension plans are all available for viewing at http://www.free5500.com via required  annual 5500 ERISA filings.  The filings show not only show total assets yet also investment vehicles used and key administrative rules.

What follows is an analysis of Bain Capital’s 2010 Profit Sharing plan, a plan that likely explains how Mitt Romney so effectively built his IRA into a balance some speculate could be as high as $100 million.

What they appear to be doing is using a “common collective trust” account at Merrill Lynch that likely has Bain Capital partnership related investments contributed at artificially low prices and then rolled out into IRAs each year by participants.  This explains in part why the current plan is so small in terms of total assets, it is essentially being flushed each year.  In 2010 almost a third of the entire plan was rolled into IRAs and the plan document does indeed clearly state that participants are entitled to do one rollover each year.

 

A few key financial facts followed by copies of key documents:

1)  Total assets were $28 million at 12/31/2010 with 719 participants.  Each participant can contribute up to $42K per year.

2)  60 percent of the investments are in the “collective trust”  held at Merrill Lynch.  The remaining 40 percent are in standard mutual funds.

3)   Total direct rollovers out of the plan into IRAs in 2010 was approx $9 million, representing almost a third of total plan assets.

Observations:

1)  It looks like Bain is allowing employees to do the annual rollovers to avoid ERISA rules on annual  contribution limits of $42K and disguise gains on their portfolio securities contributed.  And would it not be interesting to compare subsequent IRA values for the same investments with the values rolled over previously?

2) Most plans allow rollovers only when a new plan is created or when an employee leaves the firm.  Bain again allows existing employees to do one rollover per year.

3)  The profit sharing plan is audited by Pricewaterhouse Coopers, also the auditor of record for Bain Capital.   This is the firm responsible for reviewing Bain’s carried interest charges, etc. as part of their audit.  If indeed Bain investments are included in the profit sharing plan, that would be a significant conflict of interest.  Bain generally charges carry fees of 30 percent, 50 percent higher than the industry standard 20 percent.

Bain Capital 2010  ERISA 5500 Filing

Bain Capital –  Total Participants 719

Collective Trust 60 Percent of Total Investments

Employees Direct Rollovers in 2010 Approx $9M

Existing Employees Can Do Annual Rollovers

Summary of Specific Investments

Audit Opinion by Pricewaterhouse Coopers

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