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Freeport and the Autodrome, how venture capitalists operate

freeportIn the last article about Freeport it was reported that one of its directors, Robert Hodges, had resigned his position as head of CEREP (Carlyle European Real Estate Partners), which is the European company owned by Washington-based private equity firm Carlyle.

Freeport's only shareholder (according to the last return) is CEREP UK Investment D GP Ltd and this company is owned by Carlyle (through another European-based company  registered in Luxembourg, CEREP Sarl).

Hodges resigned in March along with another Freeport director, Frenchman Eric Sassons. Now both have also resigned from Freeport along with Iestyn Roberts and company secretary Ian Brownstein.  The new directors are Matthew LoRusso, appointed on the 2 September and Hafiz Mohamed Ali. At the time of writing it was not confirmed who was replacing Ian Brownstein as company secretary, or even if they will replace him.

Canadian Hafiz Mohamed Ali seems to be a reappointment as he was already listed as a director on the last annual return and has been a director since September 2007. It seems he may have been reappointed under another contract or with different duties. His job occupation was described as “senior associate”; let's hope his continued association with Freeport does not lead to some further unnecessary financial costs on the Portuguese economy.

LoRusso' appointment means that Carlyle is still maintaining its interests in the company as he is mentioned on the Carlyle website. According to his page on the site, before he joined the Washington-based private equity firm he was the chief financial officer of Snyder Enterprises. Before that he was the controller of the Washington Redskins (American NFL “football” franchise) for six years. His role in Carlyle is described as a Principal in the Investment Services Group “focusing on fund management and reporting of the Real Estate Funds”.

The last phrase is the most important, especially as LoRusso has also been appointed director of CEREP UK Investment D GP Ltd, Freeport's only shareholder. As stated above, CEREP stands for Carlyle European Retail Estate Partners. This is a fund into which investors  can put their money in; any increase in their capital can thus only come about  through increases in land (and often property) value. This is clearly one of Carlyle's main objectives, not just in Portugal but with many of its other companies across Europe and other parts of the world. We could go even further and state that is also the main modus operandi of other private equity firms,  like Portugal Capital Ventures (See article on Portugal Capital Ventures'  supposed taking over of Parkalgar.)


Carlyle's main mantra is “creating value”, but like all private equity firms it creates very little; the main way it can create value for its investors is by causing artificial bubbles in asset  prices. If you read books like, for example All The Devils Are Here about the financial “crash” which started in 2007-08, you may get the (wrong) impression that these crashes and bubbles are just “accidental”. But they are done on purpose by people who control the flow of capital. Anyone who deliberately blows into a balloon knows that an artificial bubble of air is caused. Or, in a better example,
anyone who puts a blockage in a water flow (like standing on a hosepipe) knows that a build-up will result at the pressure point. In financial terms, if you know the exact moment when the pressure will be released (or when the balloon is about to burst), then you can make the most money. Further, if you are colluding with others... you get the point!

Some of the recent deals CEREP (through Robert Hodges) was involved in was purchasing property in central London as private accommodation for students. As land prices increase as it becomes scarcer (or is controlled by fewer people) then not only do asset prices rise, but so do the rents. At the height of the bubble Carlyle can then sell off  any buildings, to gullible buyers easily fooled by sweet-talking estate agents  (who are only interested in their commission), based on PAST returns. When  property prices fall (and they always do, even marginally) and potential renters  also dry up, then the unfortunate buyers usually ends up scratching their heads  due to supposedly unforeseen circumstances. Smart investors learn and realise their mistakes, but as the old saying goes, there is one (potential gullible buyer) born every minute!

But take don't my word for all this.  If you go on the Carlyle website you can read what they claim is their “edge”. I will quote it in full here:”Value creation is the core of our existence. We invest in assets, work to make them better and seek to sell them for a profit.  Carlyle uses its One Carlyle global network, deep industry knowledge, Executive Operations Group and portfolio intelligence to create and execute a value creation plan for each of our corporate private equity and real assets investments. Our success helps investors achieve their goals, such as state pension funds working to secure the retirement of millions of public employees”.

This stuff is so meaningless. I wouldn't even know how to explain it to someone in layman's terms. Actually I would. I would simply refer to a reputed quote attributed to William Conway (one of Carlyle's three CEOs) who often told (and possibly still does) his employees to go out “and make me money.” Now that is a simple sentence we can all understand: the only people Carlyle really care about are themselves and their close corporate buddies.

If you read the self-promoting rubbish on Portugal Capital Ventures' website it's pretty much  the same as Carlyle. Here is a taster: ”The creation of value in our  portfolio is achieved through strategic advisement, the disciplined use of  financing and active support to management, all complemented with a highly rated  business network.” One could almost be forgiven for thinking that there must be a whole team of copywriters sitting in an office churning out this nonsense when they are not writing copy for birthday and Christmas cards! This is just business mumbo jumbo; the corporate version of witchdoctor praying to spirits. You might as well believe in tooth fairies!

But there is more. If you go to one  website where InovCapital (one the three companies which formed Portugal Capital  Ventures – the others being AICEP Capital Global and Turismo Capital) is  mentioned you will read this: InovCapial claim to “Assume a new  philosophy of market conduct, maintaining the rigour and the proximity of  participating companies, focusing decisively on pro-activity, dynamics and  innovation. It is this approach which we translate our core idea – 'Successful  Partnerships for Innovation.'”  “Pro-activity”? “Dynamics”?  “Innovation”? Maybe we could add some other terms, like “duplicity” and “subterfuge”. Such as why eight articles of the Parkalgar's constitution were changed on 13 March 2009, just as approximately 1.3 million euros of preferential (cat A) shares were being issued!

Maybe Jose Franca, the esteemed CEO of Portugal Capital Ventures, could get one of his overpaid employees to draw up a table of the original articles and the new one next to it, and then publish this information in a newspaper in plain language so that everyone can understand the new legal position of the company. Is that too much to ask for a former minister of education? (Jose Franca was Secretary of State for Education in 1991/2.)

As many people in the Portugal are Catholics perhaps I might be forgiven for referring to one of Jesus' less well known sayings: “Where there is a dead body, there the vultures will gather.”  (Luke 17:37) Jesus could have almost been referring to modern-day venture capitals! Even more interesting is that I have used the more modern translation  rom the New International Version (NIV) of the Bible. If you were to go back to  the time of James I (first Stuart king of England) and his 1611 version (now  known as the KJV) you would see that the word “vultures” was originally  translated as “eagles” (from the original Greek word aetos). As eagles do not feed on carrion, the original translation was more accurate; whatever was feeding off the dead body had been active in its destruction. Have you noticed what the American symbol is?

But back to Freeport and Carlyle.  With regards to Robert Hodges and Iestyn Roberts, their resignations do not necessarily mean that they have ceased their business interests in Freeport.  They are both still directors of Freeport Retail Limited, a management company they set up in 2010. Though some interesting points remain. When Hodges, and also Sassons, resign from a company it normally seems to point to closure.  Another Carlyle company which both Hodges and Sasson were involved with (both were directors, though Hodges still is at the time of writing) but which seems to be being dissolved is Cheapside GP (II) Ltd. If we look at the last balance sheet (31 December 2010) we can see the net worth of the company: shareholders' funds - (£45,935). Oops, there aren't any!

This is the third of three companies associated with Carlyle that I have looked at which have been overdrawn (the two others are Freeport and CEREP UK Investment. D GP Ltd) and has no real assets.  Perhaps readers can email Iestyn Roberts (Freeport's former director) and ask him where the assets are: _ir@freeportretail.com_ (mailto:ir@freeportretail.com) .  (And who
actually owns them?)

Freeport's and CEREP UK Investment D GP Ltd accounts will not be to be published until sometime next year. We will have to wait see what the results will be. With Freeport's number of directors now being reduced to two (from four), does it mean a lower profile for Freeport in Carlyle's scheme of things? Certainly the departure of senior figures like  Iestyn Roberts and Robert Hodges might suggest so. However, as both seemed incapable of actually doing their jobs properly their departures might not actually be a bad thing. Iestyn Roberts signed off the Freeport Retail Limited accounts without checking that they agreed; they were out by £300.

While Hodges did the same thing with Freeport, though the error here was almost £168,000. Not  a huge amount when the balance sheet is overdrawn by £3.6 million! (If you meet them in at a hotel bar then feel free to let them pick up the tab. They clearly have no qualms about paying out for such small amounts and, in any case, will only write off these expenses to “travelling and entertaining”, or include them in their “management  charges”. And no-one's checking anyway; certainly not John Bennet, the Senior Statutory Auditor for RSM Tenon Audit Limited, Freeport's accountants. RSM have now been taken over by Baker Tilly. Let's hope, should they continue to prepare Freeport's accounts, they can actually add up! But as they are probably keeping most of the same staff...)

Perhaps the pressure was getting to poor old Hodges; he had directorships in over 30 companies (not to mention company secretarial duties). Maybe that was what made him take his eye off the ball. With Hafiz Mohamed Ali apparently having less stressful duties perhaps he might be able to sign off accounts that agree, do not attempt to mislead the public by stating debtors that are actually inter-company accounts, and hopefully show the company as being worth something. However, the negative side is the fact that the other director, Michael LoRusso, is apparently based in  Washington!

In one reply to an email Iestyn Roberts defended Freeport's position by stating that the company helped to provide jobs for the Portuguese. So why is it that in all the documents that I have seen, not one Portuguese name has appeared? Further, Freeport is now being run by a Canadian with an Arab-sounding name and a Washington-based American.  Perhaps the reason for this is that there must apparently be a plethora of well-paid jobs in Portugal and the Portuguese are just not interested in these low-grade positions any more!

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