District's Carlyle Senses a Profit in Toxic Bank Assets

[Joanne98]

By Thomas Heath
Washington Post Staff Writer
Monday, February 16, 2009; Page D03

District-based Carlyle Group, a giant private-equity firm, has raised around $1 billion and hopes to add $2 billion more for investments in financial institutions that come up for sale under President Obama's economic rescue plan, according to people familiar with the company's plans.

The buyout firm will use the money to help with the recapitalization of banks whose balance sheets have been rocked by toxic mortgage assets and are in need of cash, said the sources, who spoke on condition of anonymity because they are not authorized to speak publicly. The financial crisis has crippled institutions big and small.

Seeking to jump-start the economy, Treasury Secretary Timothy F. Geithner last week said he will seek private-sector help for the banks, offering loans at favorable rates and putting up government backing to reduce the risks to investors like Carlyle.

With $40 billion in cash on the sidelines waiting for the right play, Carlyle could find many profitable deals in the financial sector.

Two of the firm's co-founders, William E. Conway Jr. and David M. Rubenstein, have been saying for months that there is a role for private equity in the bank bailout and that there's money to be made.

http://www.washingtonpost.com/wp-dyn/content/article/2009/02/15/AR2009021501283.html?hpid=topnews

[Joanne98]

1. ...........

Johnson said the empire is making money, but like any entrepreneur, not every investment has paid off. He laughs when asked if his Bobcats is profitable. He said the profit will come when he sells it. Urban Trust Bank has 16 branches (14 in Wal-Marts, mostly in Florida) and $300 million in deposits, but has yet to make money. Soon, he says. A $200 million private equity fund called RLJ Equity Partners, in which he is teamed with The Carlyle Group, is still raising money after two years.

"The Johnson empire looks at itself as making money in some assets. It has growth assets where we are putting in capital." In other words, he continues to invest in companies, betting that as the economy improves, the companies will grow into profitability. I am guessing the bank, auto dealerships and retirement savings businesses, fit into that category.

"When you are a serial entrepreneur, you get a lot of deal flow of ideas," he said. "And you sort of want to move on them. If you can get there first, with the right resources, you can create tremendous upside value when other people are sitting on the sidelines."

So here he is, teaming with Scientific Games in a strategic alliance to pursue video lottery gaming in the Caribbean and Latin America.

This is the plan: an RLJ subsidiary called Caribbean CAGE will urge Caribbean and South American governments to close illegal video gambling machines in their country and go legitimate by allowing Johnson and his team to install their machines. The machines are interconnected by satellite or wireless, so that the parties -- government, venue owner, Johnson and Scientific Games, can follow every dollar. The satellite system allows Scientific Games to track each game, pulling the unpopular ones and loading more lucrative ones into the terminals. The venues could range from a bar or restaurant to a bodega or Laundromat.

Johnson estimates the governments will take about 40 percent of the revenue from the machines, with the rest divided between Cage/Scientific Games and the venue owner. Johnson is guessing he will get about a quarter of the revenues, which could put his earnings in 2013 somewhere north of $400 million before taxes and interest.

"My feeling is that this business is of such significance, that it creates a unique opportunity for me that's going to change my focus in business in this region, which means a couple of things on how I'm going to operate the RLJ Companies," Johnson said. "I'm relocating myself down to Florida because it's closest to where I think the core business of the RLJ Companies is going to be over the next five years."

Johnson will have a small team with him in Florida, but he will leave the private equity firm at their headquarters in Bethesda.

Scientific Games will supply the equipment and technology. Johnson and his partners will attempt to persuade the governments to install the new machines and throw the unregulated ones out. Sounds straightforward enough, but it's not going to be easy. There's bound to be competition and defenders of the status quo. To prevail, Johnson foresees teaming up with local partners or entering into professional services contracts with the governments.

"The hard part is getting the governments to say we want to break that stranglehold of illegal machines on the population," Johnson said. He hopes the lure of new revenue streams will be too much for governments to pass up, just as U.S. states have turned to gambling as a revenue source.

http://voices.washingtonpost.com/washbizblog/2009/02/value_added_14.html?hpid=news-col-blog

[bemildred]

2. This guy ought to convince governments to legalize drugs of abuse.

Think of the money that could be made there. Think of the "stranglehold of illegal drugs" on the population. It's a sure winner. Think of the "lure of new revenue streams" in that venture.