Tuesday, 19 September 2017
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FreeportIn March this year it was reported in the Financial Times that two of the Carlyle Group’s directors of its European operations had resigned: Robert Hodges and Frenchman  Eric Sassons. These two individuals are also two of Freeport’s four (according to the 2012 annual return) directors, though neither is a shareholder.  Freeport's only shareholder is CEREP UK Investment D GP Ltd.
As revealed in a previous article, Freeport has been owned by American private equity company the Carlyle Group since 2007.

At the time the acquisition did not go with some hiccups and there were strong suggestions that Carlyle wanted to pull out of the deal. They considered that they were buying Freeport at the top end of the market.

As recently as 2011 Carlyle reported an increased funding of £100 million into its European operations – principally Freeport. Where this money went remains a bit of a mystery because Freeport's balance sheet shows a very unhealthy overdrawn balance of approximately £3.6 million while its parent company, CEREP UK Investment D GP Ltd, also has a negative balance of approximately £14.9 million.

Back in 2011 Hodges seemed very confident about the future. Look at his comments only two years ago, “The new investment that we have secured for Freeport underpins its strong position in the European outlet mall sector.” Strong position? Then why the need for a £100 million refinance? Hodges continued, “The firm has made great progress in improving occupancy at all centres and outperforming compared to other retail sectors. We have seen the creation of Freeport Retail [another company] as offering a valuable new service to capitalise on this expertise as we explore further investment opportunities across Europe.”

There is one word for this nonsense: waffle. The waffle ‘important’ CEO's like to spout, usually before the company goes bust.

By March of this year both Hodges and Sasson had chosen to leave the group. The article in the Financial Times did not give further details on the resignations of both Hodges and Sasson. Hodges is the director who has signed off the last two Freeport accounts and has been a major player in Carlyle's European real estate operations. At the time of writing his biography was still showing on the Carlyle website.

With Freeport showing losses for the first time in five years (2012 accounts) serious questions must be asked about the financial state of the operation. One Carlyle investor stated, “They are having serious difficulties with European real estate. They need to reconfigure going forward.”  That's accountancy babble for serious financial problems. In the same Financial Times article, which was referencing a letter to Carlyle investors, Daniel D'Aniello, one of Carlyle's founders, stated that Carlyle was delaying fundraising for its next European real estate fund for at least another  year.

The 2013 accounts (of both Freeport and CEREP UK  Investment UK D GP Ltd) will probably not be available until next year;  Freeport's 2012 accounts were not signed off (by Hodges) until 21 June of this  year. If there is any bad news in the accounts, such as serious losses, they are not likely to rush into getting the accounts out any more quickly than necessary. In fact, CEREP UK Investment D GP Ltd was recently warned (in July)) by Companies House that the company could be struck off because the directors had failed to file required financial information on  time.Freeport

At the time of writing it was unclear what positions both Robert Hodges and Eric Sassons would continue to have in the Carlyle/Freeport operations. Hodges was managing director of Carlyle's European retail interests. Both are also directors and shareholders of Freeport Retail Limited. As already stated, Carlyle declined to comment on the reasons why Hodges and Sasson decided to leave, merely stating that the separations were “amicable”. But then they always say that - until the lawyers get involved.

Carlyle made much of its money in 1990s after legally exploiting an obscure US tax loophole which allowed businesses to buy up unprofitable Alaskan companies to get tax credits from the US government. Later, the company was also criticised for its constant attempts to profit from its links with former US government personnel. Former employees of the White House and Pentagon which have worked for Carlyle include George H.W. Bush (father of  George W. Bush), Donald Rumsfeld, James Baker III, Colin Powell and, in Europe, former prime minister of Britain John  Major.

When George W. Bush was president it was alleged, with good reason, that his father George H.W. Bush was helping his son direct US foreign policy in ways that would make Bush Sr., his employers Carlyle, and eventually George W. Bush himself, after he left office, extremely rich. In financial circles this would be seen as insider trading. In the Bushes' and Carlyle world its simply fair game to make a financial killing – at other people's expense.

It should be stressed that none of the above is strictly illegal, though much of it is morally dubious. George Bush Sr,'s position with regards to his job at Carlyle and influence on his son, the then US president, was even questioned by Judicial Watch, an organisation that was  pro-Republican, set up during the Clinton administration. This organisation stated that George Bush Sr. should simply resign from Carlyle, such was his clear conflict of interest at the time.

Virtually all the original people who started Carlyle are still there: David Rubenstein; Daniel D,Aniello and William E. Conway. Only David Norris has left, kicked out after a dispute with William E. Conway. So you can rest assured that nothing much has changed: it's business as usual, with the main business being to make these men as much money as possible.

So with Freeport now being owned and, more  importantly, controlled by Carlyle one of the main issues should be about the  validity of its accounts. But they are worthless. Not only are they extremely opaque with no detailed profit and loss account, to make any  real sense of them you need to get back to the actual owners: Carlyle. But to go  from Freeport to Carlyle you need to go through three more companies, one  incorporated in Luxembourg, and even then, without knowing what some of the real  figures were in the first place, you wouldn't know what conclusion you were supposed to make.

To make matters even worse, Freeport's accounts seems to have been compiled with the intention to deliberately mislead anyone who reads them. For example, the balance sheet shows a debtors (supposedly current, like a bank balance) figure of £22,892,500. But this is not true. Only a very small fraction of this amount could be considered as a ‘current’ debtor (due within twelve months), approximately £270,000. The major proportion of this figure, around £22.7 million, is actually long-term loans - thus they cannot be ‘current assets.’

Further, these loans are owed to Freeport by associated companies, of which £14.9 million is owed by CEREP UK Investment DGP Ltd - Freeport's only shareholder. This company (CEREP UK) has no substantial assets. But what is really concerning is that Freeport (or its directors) seem to have a problem of employing accountants who actually can add up. Having looked at Freeport Retail Ltd's accounts for 2012, which were prepared by Ian Anderson of Maidenhead in Berkshire (UK), I noticed a small error of £300. As Ian Anderson is a member of the esteemed Institute of Chartered Accountants of England and Wales, I showed the accounts to them and they agreed with my conclusion, but merely considered the error “sloppy”.

However, having also looked at Freeport's accounts for 2012, which were prepared by different accountants, RSM Tenon Audit Ltd of Milton Keynes (UK), I detected an error of almost £168,000. In the notes to the accounts, which are supposed to give breakdowns to the figures in the balance sheet, I noticed that the amounts in the related party transactions do not agree to the figure in the balance sheet. They should.

In the notes we read that Freeport has three loans due from related companies: £4,280,400 due from CEREP Investment I Sarl (a company incorporated in Luxembourg); £4,000,000 due from Freeport Leisure (Netherlands) BV; and £14,870,051 due from CEREP UK Investment D GP Ltd. Anyone with a calculator
at hand should confirm that these three figures add up to £23,150,451 –
£67,951 more than the balance sheet figure. Either the debtors figure in the balance sheet is incorrect, or whoever complied the notes failed to agree them to the balance sheet figure. It is easily done. Hence the word: reconciliation! Somebody didn't bother.

While its easy to have to have a go at accountants who seem incapable of adding up, it should be noted that it is the directors'  responsibility to check accounts which they sign off: in this case Iestyn  Roberts (who signed off Freeport Retail Ltd) and Robert Hodges (Freeport). At the very least they should have checked that all the figures agreed, or paid a competent employee to do it for them. Perhaps they are both too worried about Freeport's increasingly worthless (and now loss-making) enterprise to worry about such small errors.

Both Freeport's CEO Iestyn Roberts, and Company Secretary Ian Brownstein,
have not replied to my emails regarding these accounts.

These are their emails: ir@freeportretail.com and ian@freeportretail.com if anyone is interested in getting answers to these questions.