Top Lbo Specijalisti

Behind
the
buyouts
inside the world
of private equity
Prepared by the
Service Employees
International Union
April 2007
Table of Contents
Executive Summary..............................................................................................5
Introduction............................................................................................................9
Incredible Wealth, Incredible Disparity.....................................................................................10
Limited Public Information.........................................................................................................11
About SEIU (sidebar)...................................................................................................................11
Inside the World of the Private Equity Buyout Industry.......................... 13
Leveraged Buyouts.......................................................................................................................14
How Money is Made.....................................................................................................................14
Private Equity and Taxes............................................................................................................15
Private Equity and Job Creation (sidebar)................................................................................17
Private Equity Public Policy Concerns.......................................................................................18
The Players....................................................................................................................................19
“Club Deals”...................................................................................................................................19
The Top Five Private Equity Buyout Firms................................................. 22

1. The Carlyle Group....................................................................................................................22
2. The Blackstone Group..............................................................................................................23
3. Kohlberg Kravis Roberts & Co. ..............................................................................................25
4. TPG............................................................................................................................................26
5. Bain Capital..............................................................................................................................27
“Behind the Buyouts:” A Look Inside Five Private Equity Deals........... 28

1. Facing the Music: When corporate restructuring leads to disappointing returns:
The Thomas H. Lee Buyout of Warner Music.......................................................................28
2. B
roadcasting Losses: An image of retirement insecurity:
The “Zeus Holdings” Buyout of Intelsat.................................................................................29
3. Not Fun and Games: The harsh consequences of a crushing debt burden:
The Bain Buyout of KB Toys....................................................................................................29
4. H
ertz So Good: The hidden costs of a “quick flip:”
The Carlyle/Clayton Dubilier & Rice Buyout of Hertz Car Rental......................................30
5. C
ome Fly With Me: Creating opportunities for workers:
The Onex Buyout of Three Boeing Plants..............................................................................31
Conclusion...................................................................................................33
Private Equity: The Opportunity................................................................................................34
SEIU Principles for the Private Equity Buyout Industry........................................................35
INSIDE THE WORLD OF PRIVATE EQUITY 3

Executive SuMMary
L argely unknown outside the financial world, an industry

called “private equity” is reshaping the American economy
almost daily, controlling a large and growing swath of U.S.
industry, including the market leaders in major industries.
“Private equity” is a broad term that encompasses a range of
strategies for investing in industrial and service companies
whose common stock is not traded on public stock exchanges.
While private equity runs the gamut from small venture capital
investments in brand-new start-up companies to multibillion-
dollar buyouts of well-known public companies, the focus of this
report is on corporate buyouts.
The private equity buyout industry, armed with more than a half-trillion
dollars of capital, is today engineering financial deals that together
are larger than the annual budgets of most of the world’s countries.
This financial juggernaut is generating hefty returns to its investors,
extraordinary riches for its executives, and newly relevant questions
about the impact of its business practices on American workers,
businesses, communities, and the nation.

Lack of Transparency
Unlike publicly traded companies that are subject to federal securities laws and
regulations, private equity buyout firms operate virtually free of oversight and public
accountability, their profits and practices largely hidden from view.
Utilizing the limited information available to the public, this report provides a snapshot for
everyday investors, workers, community members, and the public about the private equity
buyout industry and its practices, spotlighting the leading firms, and examining the inner
workings of five private equity buyout deals for their impact on workers.
The report is provided as a resource for people and organizations who may not be business
or financial experts, but whose lives, jobs, investments, or communities are or could be
affected by private equity buyouts.
The Top Five Private Equity Buyout Firms

Bain Capital (Bain), the Blackstone Group (Blackstone), the Carlyle Group (Carlyle),
Kohlberg Kravis Roberts & Co. (KKR) and TPG (formerly Texas Pacific Group) have
emerged as the five largest firms in the buyout industry in both size and influence.
These firms raise the most money, have the largest number of investment professionals
and offices across the globe, and often set standards for the industry. Their leading
executives are billionaires and they have put together the industry’s biggest deals, many
for tens of billions of dollars.
“Behind the Buyouts:” A Look Inside Five Private

Equity Deals
Five recent buyout deals illustrate many of the negative impacts deals can have on
workers and communities, but also the potential opportunity presented by private equity
transactions.
To be sure, the buyout deals and money-generating strategies that are generating
immense wealth for this industry and its investors often can have harsh consequences for
workers and the companies they buy and sell.
For the artists and other clients of Warner Music, a corporate restructuring driven by the
Thomas H. Lee buyout hollowed-out a once-proud music company, harming its image in
the music industry and potentially reducing its long-term value.
For the retirees at Intelsat who spent their careers building the value of that company,
for the 4,000 KB Toys employees laid off after the company declared bankruptcy under
the weight of a crushing debt load, and for the Hertz employees laid off in the wake of
a lucrative quick flip, private equity corporate strategies uprooted lives and negatively
impacted hardworking families.
In every case, the workers themselves had almost no voice in the process, little information
about the firms that now controlled their employers, and no role in developing the plans
that were going to change their lives for the worse.
One example, the case of the Onex buyout of the Boeing plants, shows the opportunity
that deals present if the private equity buyout industry were to focus on creating economic
benefits not only for the executives, but also for workers at the companies they own.
6 BEHIND THE BUYOUTS

Conclusion
The private equity industry’s profits come during a period of historic income inequality in
America. There is no doubt that the income being accumulated in the buyout business is
a major contributor to the concentration of wealth among the top 1 percent of Americans.
Yet questions about the role the private equity industry could play in addressing this
national challenge remain—until now—unasked, and unanswered.
There is more than enough wealth in the private equity industry for the buyout firms to
continue to prosper while also adapting their business model to expand opportunities to
benefit workers, communities, and the nation.
SEIU Principles for the Private Equity Buyout Industry

With these concerns and opportunities in mind, SEIU recommends the following
principles for the private equity buyout industry:
1. The buyout industry should play by the same set of rules as everyone else.
n The industry should provide transparency and disclosure about their businesses,
their deals, their income, their plans for the companies they buy and sell, and the
risks of the debt they load onto portfolio companies
n The industry should invest in the health, security, and long-term prosperity of
America by supporting equitable tax rates and the elimination of loopholes that
increase the tax burden on working Americans
n The industry should work to build confidence in the securities markets by eliminating
conflicts of interest and other potential abuses in their deals
2. Workers should have a voice in the deals and benefit from their outcome.
n Workers should have a seat at the table when deals are being made
n Private equity deals should create economic opportunities that align the long-term
interests of everyone that builds the value of a company, from direct employees and
contract workers to senior management
n Workers should have paychecks that can support a family
n Workers should have quality, affordable health care coverage
n Workers should have secure retirement benefits
n Workers should have a voice at work—meaning the freedom to join a union using
majority sign-up without interference from any party
3. Community stakeholders should have a voice in the deals and benefit from
their outcome.
n Buyout firms should play a proactive and constructive role in the communities
affected by their deals
n Community stakeholders should be involved as deals are being made
n The private equity buyout industry and community stakeholders should use wealth
generated by deals to improve the quality of life, the environment, the health, the
safety, and the long-term stability of communities

Introduction
L argely unknown outside the financial world, an industry

called “private equity” is reshaping the American economy,
with huge new deals announced almost daily.
“Private equity” is a broad term that encompasses a range of strategies
for investing in industrial and service companies whose common
stock is not traded on public stock exchanges. While private equity
runs the gamut from small venture capital investments in brand-new
start-up companies to multibillion-dollar buyouts of well-known public
companies, the focus of this report is on corporate buyouts.
With ownership of brand name companies such as Burger King,
AMC movie theaters, Dunkin’ Donuts, Michaels Arts and Crafts,
Hertz, and Linens ‘n’ Things, the private equity industry controls
a large and growing swath of U.S. industry, including the market
leaders in major industries. In the last year alone, private equity
buyout firms have taken ownership of the nation’s largest office
building landlord, Equity Office Properties, the nation’s largest
hospital chain, HCA, the world’s largest casino company, Harrah’s
Entertainment, and one of the nation’s largest providers of cleaning
and food services, Aramark.

Consider these facts:
n T
he biggest five private equity deals together are larger than the annual budgets of
all but 16 of the world’s largest nations. The five biggest deals involved more money
than the annual budgets of Russia and India.
n T
he annual revenue of the largest private equity firms and their portfolio companies
would give private equity four of the top 25 spots in the Fortune 500. One firm,
Kohlberg Kravis Roberts & Co. would crack the top 10. These private equity firms
have more annual revenue than companies such as Bank of America, JP Morgan
Chase, and Berkshire Hathaway.
n T
he top 20 private equity firms alone control companies that employ nearly 4 million
workers.
n T
here were a record $197 billion worth of private equity mergers in first quarter of
2007 alone.1
n I
ndustry analysts say a $100 billion private equity buyout deal is not out of the
question—putting huge companies such as Dell, Boeing, and Apple Computer within
range of the buyout industry.
This financial juggernaut is generating hefty returns to investors, and extraordinary riches
for the top executives of private equity firms.
And while the industry is not a new one, private equity’s acquisitions and influence are
growing exponentially, raising newly relevant questions about the impact of its business
practices on American workers, businesses, communities, and the nation.
Incredible Wealth, Incredible Disparity

Though exact figures are hard to come by, the hallmark of the private equity industry
is the incredible wealth being created for the small number of individuals who drive the
buyout business.
The key principals at the largest private equity firms are billionaires. Using money from
banks, insurance companies, pension funds, and other wealthy individual investors,
they continue to launch corporate buyouts worth billions, even tens of billions of dollars,
extracting fees of hundreds of millions of dollars from the companies they buy and often
generating profits of 20 percent or more.
These profits come during a period of historic income inequality in America, at a time
when millions of Americans are working harder and harder for less, with less health care,
less retirement security, and less time to spend with their children. According to a report
released in March 2007 by two leading economists, the top 1 percent of Americans—those
with incomes above $350,000—received the largest share of national income since 1928.2
The top 300,000 Americans enjoyed almost as much income as the bottom 150 million
Americans combined. The top group received 440 times as much as people in the bottom
half, doubling the gap from the 80s. And experts say the data may actually understate the
income disparity.3
The American public and leading experts alike are voicing concerns over the rising
inequality. In a December 2006 Los Angeles Times/Bloomberg national poll, 75 percent
of respondents said the income gap is a “serious problem.” And former Federal Reserve

Chairman Alan Greenspan recently said, “This (growing inequality) is not the type of thing
which a democratic society can really accept without addressing.”
There is no doubt the income being accumulated in the buyout business is a major
contributor to the concentration of wealth among the top one percent of Americans. Yet
questions about the role the private equity industry could play in addressing this national
challenge remain—until now—unasked, and unanswered. About SEIU
Limited Public Information With 1.8 million members, SEIU
Unlike publicly traded companies that are subject to federal securities laws and (Service Employees Internation-
al Union) is the fastest-growing
regulations as well as to daily scrutiny by financial analysts and the business media,
union in North America. SEIU
private equity buyout firms operate virtually free of oversight and public accountability, is America’s largest union of
their profits and practices largely hidden from view. Far from a coincidence, this lack of health care workers, prop-
transparency is built into their business model, providing buyout firms with investment erty services workers, and the
advantages that publicly traded companies do not enjoy. second largest union of public
services workers. A top priority
Utilizing the limited information available to the public, this report provides a snapshot of SEIU members is fighting
for everyday investors, workers, community members, and the public about the private to secure quality, affordable
equity buyout industry and its practices, spotlighting the leading firms, and examining the health care for all Americans.
SEIU is helping to unite work-
inner workings of five private equity buyout deals for their impact on workers. The report
ing families, business leaders,
is provided as a resource for people and organizations who may not be business or financial community leaders, and policy-
experts, but whose lives, jobs, investments, or communities are or could be affected by makers to find real solutions
private equity buyouts. to the health care crisis.
SEIU members participate in
The report presents:
pension funds with more than
n An explanation of how private equity works, the firms’ basic business model, and the $1 trillion in assets, most
of which invest 5 percent to
incredible wealth they are generating for themselves and their limited partners;
10 percent of their assets in
n A look inside the industry’s five largest firms, the Carlyle Group, Blackstone Group, private equity. SEIU is a long-
TPG, Kohlberg, Kravis, Roberts & Co., and Bain Capital. The profiles examine the time advocate of responsible
corporate governance practices
firms’ principals, some of their biggest deals, their investment industries, and how
and an active member of the
each of them are so profitable they are “printing money”; and Council of Institutional Inves-
tors, an organization of more
n An examination of five recent buyout deals that illustrate the impact private equity
than 130 pension funds whose
transactions can have on workers and their communities at the companies being assets exceed $3 trillion.
bought and sold.
And while the lack of public information available about private equity precludes a full,
comprehensive analysis of this industry, this report presents a broad overview of the
private equity buyout firms and their sometimes controversial business practices that are
driving the new economy.

Inside the World
of the Private Equity
Buyout Industry
P rivate equity buyouts are generally conducted by private

partnerships that involve three main actors: 1) investors,
2) private equity firms and 3) the companies they purchase,
known as “portfolio companies.”
Investors in private equity are typically institutional investors such as
pension funds, insurance companies and endowments, as well as high net-
worth individuals. These investors are commonly referred to as “limited
partners;” they have limited liability, but also limited control over the
management of the funds.4 They invest significant amounts of assets in
private equity funds for a fixed period of time, usually 10 years, during which
time they cannot access their investment. At the end of the fixed period, the
funds must be returned to the limited partner investors.
Most of the control of the investments remains in the hands of the private
equity firms themselves, often referred to as the “general partners.” They are
responsible for raising the money for the funds, which can vary in size from $5
million to $10 million for a small venture capital firm to more than $15 billion
for a very large buyout firm.
A typical private equity firm will raise a new fund every three to four
years. Each fund becomes the private equity firm’s working capital for a
new wave of investments in portfolio companies. The firms also work to
identify, acquire, and manage all the portfolio companies in which they
invest their funds.

Once a private equity buyout firm has invested in a portfolio company, it usually assumes
complete control of the company. It may keep the company’s senior managers in place or it
may bring in outside managers of its choosing. Even if the portfolio company’s management
remains in place, a member of the buyout firm typically joins the board and the firm has
final say over how the company is run. After a period of ownership, the private equity firm
will sell its stake in the portfolio company on a stock market through an Initial Public
Offering (IPO), to a larger company in the same industry or to another private equity firm.
Over the past 20 years, private equity has outperformed the S&P Index, a common
benchmark for stock market investments, by up to 44 percent.5 Private equity can offer
higher returns than traditional investments such as stocks and bonds, but private equity
investments are also riskier because they are less diversified and more difficult to sell.
Leveraged buyouts
Portfolio companies are rarely purchased using only the equity of the buyout firm. In order
to increase the number of transactions a particular fund can make, as well as to increase
returns and spread risk, the private equity firm uses debt—or leverage—to finance a
significant proportion of each deal.
A leveraged buyout is a lot like buying a house with a mortgage. With a down payment of 20
percent in cash, an individual can get a mortgage for the remaining 80 percent of the cost of the
house, using the house itself as collateral. Similarly, a private equity firm could take $200 million
raised from investors to buy out a company worth $1 billion. To complete the deal, the buyout
firm uses the $200 million in equity plus the value of the company as
How a Typical Buyout is Financed collateral to borrow the remaining $800 million needed to finance the
purchase of the company.
Like mortgage lenders who check that borrowers have sufficient
income to cover their mortgage payments, lenders who provide the
debt to finance leveraged buyouts seek to ensure portfolio companies
have sufficient cash flows to service the payments on the debt. If a
portfolio company that has undergone a leveraged buyout cannot
make its debt payments, the company can be forced into bankruptcy
by its creditors. Under most circumstances however, in contrast to a
home mortgage, the private equity firm and its investors who funded
the equity portion of the deal are not liable to repay this debt.
How Money is Made

Unlike a typical investment in shares of a publicly traded company, which may provide
periodic dividend payouts or which can be sold at any time, an investor in private equity
makes money only when the firm sells or “exits” the portfolio companies that make up
the fund. Such exits can include partial sales, complete sales, or “recapitalizations.” In a
recapitalization, the private equity firm pays itself a special dividend typically funded by
having the portfolio company borrow more money.
The limited partners in a given private equity fund typically receive together about 80
percent of the profits from the deal. The remaining 20 percent is kept by the private
equity firm as its fee for making a profit for the investors. This profit is typically called
“the carry,” or “carried interest.” In addition to the carry, private equity firms charge a
1.5 percent to 2 percent annual management fee. Many private equity firms also charge
management fees to the portfolio companies in which they invest, though this revenue
is usually shared with investors. Some firms have also begun charging transaction fees

where the private equity firm receives a percentage of the value of any acquisition or sale
of a portfolio company. For the largest buyouts, these transaction fees alone can be worth
hundreds of millions of dollars.
Impact of debt levels on LBO returns

Leverage is not only central to acquiring portfolio companies but it also plays a major role in successful private
equity firms’ high returns. The simple example below illustrates how higher debt levels can produce higher returns
on investments that are otherwise identical.
Investment A
1. Buy a $100 company with $100 cash
2. Sell the company for $120 cash after one year
$120 - $100 = $20 = 20% Return on Investment (ROI)
Investment B
1. Buy a $100 company with $50 cash and $50 debt @ 10% interest
2. Make one $5 interest payment
3. Sell company for $120 cash after one year
4. Repay $50 loan
$120 - $5 - $50 - $50 = $15 = 30% ROI
Investment C
1. Buy a $100 company with $25 cash and $75 debt @ 10% interest
2. Make one $7.50 interest payment
3. Sell company for $120 cash after one year
4. Repay $75 loan
$120 - $7.50 - $75 - $25 = $12.50 = 50% ROI
As this example shows, Investment C earns the highest returns by using the least amount of cash and the most
debt. This picture would be reversed if the investments all lost money, which is one of the reasons leveraged buy-
outs are considered risky investments.
Private Equity and Taxes

Like all sophisticated companies, private equity firms aggressively manage the tax
liabilities of their own firms and those of their portfolio companies. For example, according
to the Financial Times, Blackstone paid taxes at a rate of 1.4 percent last year. 6 If it had
been taxed at the 34.5 percent rate that applies to companies such as Goldman Sachs,
for example, Blackstone’s tax bill last year would have increased from just $32 million to
nearly $800 million.7
Policy-makers are focusing on three unique tax advantages enjoyed by private equity firms
and their partners:
1. The tax treatment of debt vs. equity
Buyout firms depend on leverage to meet their target returns. One benefit of relying
on debt financing to acquire portfolio companies is that buyout firms can deduct their
interest costs from portfolio companies’ profits, effectively reducing taxable income.
Public companies, which are more heavily financed with shareholders’ equity and often
face shareholder opposition to the aggressive use of debt, are generally unable to avail
themselves of this tax provision to the same extent. 8 The tax advantages of debt also
allow buyout firms to bid more aggressively for acquisition targets than most public
companies.9 According to Jay Ritter, a Professor of Finance at the University of Florida,
the “consensus is that [the tax advantages of using debt financing] can add more than 10

percent to the value of a bid” for an acquisition, allowing aggressive users of debt such
as buyout firms to outbid potential acquirers that rely more on cash or equity.10 Tax
authorities in the United Kingdom and Germany currently are considering curtailing
buyout companies’ ability to deduct interest payments.11
2.Taxing carried interest as capital gains instead of income

The primary source of revenue for a successful private equity firm is the percentage of
profits earned when portfolio companies are sold or recapitalized. This “carried interest,”
which is usually about 20 percent of the profits from the sale of a portfolio company, is
retained by the private equity firm as compensation for earning a good return for its
investors. The firm then distributes the “carry” to its owners and employees, with the
founders and senior partners taking the lion’s share. The firm’s partners do not pay
ordinary income tax on their portion of the carry—a rate of 35 percent—but instead pay
the lower capital gains tax—a rate of only 15 percent. For example, paying taxes on $1
billion of carried interest at the capital gains rate of 15 percent instead of the typical
income tax rate of 35 percent saves private equity principals more than $200 million in
taxes. Recent press accounts suggest that members of Congress, including the ranking
Republican member of the U.S. Senate Finance Committee, are considering changing the
tax regime to tax carried interest at ordinary income tax rates.12 An anonymous Senate
aide was quoted in the Financial Times saying “We are looking into instances where
funds may be using tax strategies to convert what would be income into capital gains for
tax advantage.”13
3. A potential tax-advantaged corporate structure created when private equity
firms go public
This year, major private equity firms are beginning to sell shares to the public not just
in their portfolio companies, which they have always done to exit their investments,
but in the private equity firm itself. Private equity firms considering selling themselves
in a public offering may have discovered a creative way to pay lower entity-level taxes
than other public companies. Following a path blazed by the hedge fund and private
equity firm Fortress Investment Group in its IPO earlier this year, Blackstone Group
has announced plans to go public as a master limited partnership. According to Reuters,
“under U.S. tax law, master limited partnerships do not pay the 35 percent corporate
tax rate, but rather distribute nearly all their profits to common unit holders who
individually are allowed to pay 15 percent capital gains tax rates.”14 “I don’t think
Congress had this in mind when it wrote the publicly traded partnership rules in 1987,”
Victor Fleischer, a law professor at the University of Colorado in Boulder, told Reuters.
He added, “there’s some risk that the IRS could rule against Blackstone and say that
the structure isn’t any good, and I think there’s a significant risk that Congress could
change the rules.”15
Policy-makers are beginning to question whether providing the private equity buyout
industry with these tax advantages benefits society as a whole and the overall economy,
or whether they simply make it easier for private equity to acquire and profit from
companies at the expense of public shareholders and federal and state tax revenues.

Private Equity and Job Creation
There is little reliable quantitative analysis about the reasons for treating their numbers with caution.
private equity buyout industry’s impact on job creation. As
A recent A.T. Kearney report, a meta-review of 12 existing
Business Week bluntly notes, however, “buyout shops have
studies, claims that private equity created 600,000 jobs
always been associated with job losses.”16 Even industry
in the United States between 2000 and 2003.19 But the
studies that make bold claims that buyouts are creating
Kearney report actually sheds no light on the impact of
jobs acknowledge that in many cases jobs are lost.17
buyouts on employment because it doesn’t distinguish
A detailed study of more than 1,300 buyouts in Great buyouts from venture capital that provides seed money to
Britain between 1999 and 2004 by the independent Centre start up new businesses.
for Management Buy Out Research puts industry claims
While such broad studies may help the private equity
in perspective. Overall, buyouts result in job losses during
industry attempt to shape public perception of its industry,
the first year. After six years, more than 60 percent of
they do little to help the public understand what is really
firms have added jobs—while more than 35 percent have
happening when the buyout specialists take over estab-
cut jobs. In contrast to management buyouts, (situations
lished companies.
where existing management partners with a private equity
firm), where the study finds that companies increased A 2005 study by the Center for Entrepreneurial and Fi-
employment by 36 percent on average, buyouts where the nancial Studies (CEFS) for the European Private Equity and
private equity firm installs new management indicate job Venture Capital Association claims that more than 400,000
losses of more than 18 percent after six years.18 net jobs were created in Europe by buyout-financed com-
panies between 2000 and 2004.20 The study’s claims are
Even in the cases where buyouts result in job growth, it is
based on self-reported information from a small set of
unclear that workers are benefiting. Industry studies make
portfolio companies—just 99 out of more than 1,400 com-
little attempt to look behind the numbers at what is hap-
panies that underwent a buyout during the period studied.
pening to workers and communities:
Any evaluation of how buyouts result in employment
n What types of jobs are the buyouts creating? growth must distinguish between organic growth and
n Are the jobs that buyouts create full time or part time? growth through acquisitions and mergers. The CEFS study
does not attempt to explain what led to employment
n Are wages of both existing and new workers going growth at specific companies. Instead, the study simply
up or down? assumes that all employment changes of 20 percent or
n Do these new jobs come with health insurance and less are due to organic growth. The study provides no
retirement benefits? rationale for using the 20 percent figure.21
n Where are the new jobs located? Are the buyout A recent Financial Times analysis of the 30 biggest deals
firms investing in the communities where offices and in Europe during 2003 and 2004 found that employment
plants are located? Or are they shifting jobs else- at the acquired companies increased 25 percent since the
where in the United States or overseas where the deals were completed.22 But this claim is based on figures
pay is lower? that have not been adjusted to account for nonorganic
growth. The Financial Times claims that net job growth at
n What impact does the job restructuring have on the the acquired firms totaled nearly 37,000. Analysis of the
local economy and tax base? Times’ figures shows that nearly 50,000 jobs were added
n What is the real impact of these buyouts on work- and about 12,500 jobs were lost. Most of the 37,000 new
ers, families, and communities? jobs, however, were added through acquisitions, including
22,000 attributed to Blackstone’s purchase of Southern
Industry Studies: Questionable Cross, which was then merged into other Blackstone buy-
Assumptions, Methodologies, Conclusions out companies. These are not jobs the buyouts created.
Industry groups claim that buyouts create jobs. But since While it is true that most of the job losses in these 30
private companies do not publicly disclose information deals can be attributed to companies selling parts of their
about their employees or company growth, industry claims business, actual net job growth was just a fraction of the
are difficult to evaluate. Studies based on self-reported total claimed by the Financial Times.
information from a limited set of companies may not Despite claims by recent reports that private equity buy-
paint a reliable picture of what is happening across the outs create jobs, serious problems with the studies’ meth-
economy or in all industries. odology, assumptions, and conclusions raise significant
A close look at some of the studies provides a number of questions about the reports accuracy and reliability.

Private Equity Public Policy Concerns
There are a number of practices of private equity buyout firms that are creating widespread
concern among public policy-makers, securities markets, and other stakeholders.
1. Quick Flips. Private equity typically owns companies for three to five years, seeks to
improve operations and profitability, and then relists the companies as healthier and
better suited for long-term growth. Increasingly in recent years private equity has
sought to increase their funds’ investment returns by liquidating part or all of their
investment more quickly. To accomplish this they engage in “quick flips,” relisting
companies within a year or two of taking them private, with more leverage, but few
if any operational improvements. They also cause their portfolio companies to borrow
more money to pay the private equity firm a special dividend, sometimes within
months of the original acquisition.
2. Conflicts of Interest. The managers and directors of a public company owe a
fiduciary duty to maximize returns to shareholders. But when private equity invites
those same managers or directors to participate in a leveraged buyout, their interest
shifts to help the private equity group get the lowest price possible for the company.
More than one commentator has suggested that this inherent conflict should be
regulated by prohibiting management participation in buyouts.23 In addition, the big
private equity firms are now the largest customers and generators of fees to the global
investment banks and commercial banks for their stock and bond underwriting, bank
lending and investment banking advisory services. These multifaceted relationships
with firms such as Goldman Sachs, Merrill Lynch, and JPMorgan Chase led Robert
Kindler, vice chairman for investment banking at Morgan Stanley, to say at a recent
panel at the Corporate Law Institute at Tulane University, “We are all totally
conflicted — get used to it.”24
3. Debt Risk. Leverage is the key to the high returns private equity is able to
generate (see box on Page 13). The easy credit markets of the last few years have
helped fuel the surge in private equity, and the persistence of relatively low interest
rates with steady economic growth has meant that there have been relatively few
defaults among private equity-owned companies. In addition, the banks that are
underwriting most of this debt are repackaging it and selling it to other lenders and
investors, laying off the risk on others with limited additional due diligence by the
new creditors. One result is a relaxing of underwriting standards by the original
lenders, with debt that is “covenant-light” or even “covenant-free.” Observers and
policymakers worry about the impact a sudden downturn in the economy or an
increase in interest rates will have on portfolio companies and the ripple effect of a
rash of defaults on the broader financial markets.
4. Private Equity Exuberance: Private equity firms raised $215 billion in 2006— the
most ever. The total exceeds the amounts raised during the last private equity
bubble, in 2000. For 2007, buyout firms are hoping to raise even more—as much as
$400 billion. 25 With all this capital being raised, it increases the competition for deals,
increasing the likelihood some firms will overpay for deals or do deals that make
less economic sense. In addition, a significant downturn in the public equity markets
would severely impair the ability of private equity to exit deals that were poorly
conceived, highly leveraged, or overvalued.

The Players
One of the reasons private equity has gotten so much attention is the increasing frequency
with which large publicly traded companies are going private in leveraged buyouts.
According to The Wall Street Journal, eight of the 10 largest buyouts ever in the United
States were announced in the last 12 months.
A handful of large buyout firms were involved in nearly all Private Equity Fundraising
these headline grabbing deals. Of the hundreds of buyout firms 25
worldwide, Bain Capital (Bain), Blackstone Group (Blackstone),
the Carlyle Group (Carlyle), Kohlberg Kravis Roberts & Co.
20
(KKR), and TPG (formerly Texas Pacific Group) have emerged
as the five largest buyout firms in this growing industry.
15
The funds they are raising for their acquisitions are huge.
In 2007, KKR and Blackstone each announced they are
building $20 billion funds.26 TPG has raised, and Carlyle is 10
currently raising, $15 billion funds.27 Bain has a $10 billion
fund.28 In total, these five firms will soon have $80 billion in 5
funds, which could conservatively translate to more than $1
billion in fund management alone.
0
The large portfolios of the biggest buyout players illustrate
their reach into and influence over the economy. According
to Carlyle’s Web site, companies owned by Carlyle employ
more than 200,000 people worldwide29 while The Wall Street Journal reports that there
are more than 500,000 employees at KKR-controlled firms.30 If viewed as corporate
conglomerates, these employment figures put the biggest buyout firms in the same league
as Verizon and FedEx in the case of Carlyle, and McDonalds in the case of KKR. 31 Overall,
the five largest buyout firms control companies that employ more than 2 million workers.32
“Club Deals”
But even with the increased fund-raising capacity of the top firms, some of the biggest
deals are beyond the purchasing power of any one firm; increasingly, private equity firms
are joining together for specific transactions. These “club deals” allow the firms to share
risk and purchase ever larger companies.33
These buyouts often involve familiar brand-name companies worth billions of dollars and
which employ thousands of people. For example, the table below lists 10 of the largest
private equity buyouts announced in the past two years; all but one was a “club deal.” The
value of these deals totaled more than $270 billion and estimates based on public filings
suggest that 630,000 employees were involved.
Several of the nation’s largest firms, including Kohlberg Kravis Roberts & Co., the Carlyle
Group, Clayton, Dubilier & Rice and Silver Lake Partners, have received letters from
the Justice Department seeking broad information about their business practices and
involvements in club deal auctions going back to 2003. The inquiry appears to be part of
a civil investigation into whether these big buyout firms may have conspired to restrict
competition and hold auction prices down by forming bidding groups and agreeing not to
compete against each other when multiple firms are interested in the same deal.34

The 20 Largest Players
Private Equity Assets Under Portfolio
Investment Firm Management Company
Employees
Blackstone $79 Billion 350,000
Carlyle Group $56 Billion 200,000
Bain Capital $40 Billion 662,000
Texas Pacific Group $30 Billion 300,000
KKR $27 Billion 540,000
Cerberus $22 Billion 363,000
Providence Equity Partners $21 Billion 86,000
TH Lee $20 Billion 391,000
Welsh, Carson Anderson & Stowe $16 Billion 62,000
Hellman & Friedman $16 Billion 73,000
Warburg Pincus $15 Billion 375,000
Madison Dearborn $14 Billion 149,000
Apollo Management $13 Billion 297,000
TA Associates $10 Billion 28,000
CCMP Capital Advisors, LLC $10 Billion 379,000
Goldman Sachs Capital Partners $9 Billion 1,050,000
DLJ Merchant Banking Partners $7 Billion 63,000
Vestar $7 Billion 53,000
Silver Lake Partners $6 Billion 301,000
Clayton, Dubilier & Rice $5 Billion 109,000
Onex $5 Billion 167,000

The Ten Largest Buyouts
2/24/2007 TXU Corporation* KKR,TPG 45 7,262
Equity Office
11/20/2006 Properties Blackstone 39 2,300
Bain, KKR,
7/24/2006 HCA Inc. Merrill Lynch 33 186,000
04/02/2007 First Data Corp KKR 29 29,000
Harrah's
10/2/2006 Entertainment Inc. Apollo Management, TPG 28 85,000
Clear Channel
11/16/2006 Communications* Bain, Thomas H. Lee 27 26,500
Carlyle, Goldman Sachs,

AIG, Bill Morgan,
Fayez Sarofim, Mike Morgan,
Riverstone Holdings,
8/28/2006 Kinder Morgan Richard D. Kinder 22 8,481
Blackstone, Carlyle,
Permira Advisors, TPG,
9/15/2006 Freescale Stone Tower Capital 18 22,700
Cerberus Capital, Kimco

Realty and others including
1/23/2006 Albertson's SuperValu and CVS 17 234,000
11/13/2005 Hertz Carlyle, CD&R, Merrill Lynch 15 31,500

The Top Five
Private Equity
Buyout FirMs
The five largest private equity buyout firms raise the
most money, have the largest number of investment
professionals and offices across the globe, and often set
standards for the industry.
Carlyle: The Carlyle Group

Headquarters: Washington, D.C.
The Deals
Kinder Morgan: The Company
$22 billion Founded in 1987, The Carlyle Group, with $56 billion in assets currently under
2006, (with Riverstone Holdings management,39 has historically been known as the most politically connected private
LLC) equity firm, capitalizing on its connections—George Bush Sr. and Jr., Frank Carlucci,
Energy infrastructure provider35 John Major, and James Baker III previously served as advisers—to raise funds and secure
Freescale Semiconductor: government contracts. After controversy surrounding its political ties, Carlyle reduced its
$17.6 billion exposure to companies reliant on government contracts, particularly defense contracts,
2006, (with TPG; Blackstone; and focused on diversifying its portfolio.40 Carlyle has also evolved from a specialist in
Permira) deals under $1 billion to become “a big game hunter,” cutting a number of multibillion-
Semiconductor maker36 dollar club deals with fellow top-five private equity firms since 2005.41 Carlyle is currently
Hertz: raising a $15 billion U.S. buyouts fund, nearly double its last fund.42
$15 billion
Carlyle invests in a wide range of industries, including aerospace and defense, automotive
2005, (with Clayton Dubilier &
Rice, Merrill Lynch) and transportation, consumer and retail, energy and power, health care, industrial, real
Rent-a-car company37 estate, technology and business services, and telecommunications and media. Either alone
or as part of club deals, Carlyle has bought out such well-known companies as Loews
VNU Group (Nielsen):
Cinemas and Dunkin’ Brands (Dunkin’ Donuts and Baskin Robbins). At present, Carlyle’s
$10 billion
portfolio includes approximately 140 companies43 which in turn employ more than 200,000
2006, (with Blackstone, KKR,
Thomas H. Lee Partners, workers and have $68 billion in sales.44
Hellman & Friedman, AlpInvest
If Carlyle’s portfolio constituted one publicly traded corporation, it would hold spot No. 21
Partners)
Information and media company38 in the Fortune 500.
The Moneymakers
Carlyle’s key decision-makers are its three founding partners—David Rubenstein, Daniel
Source: Fred Prouser/Reuter/Landov
D’Aniello, and William Conway—and the company’s chairman, Louis V. Gerstner Jr.
David Rubenstein: Co-founder Rubenstein is former deputy domestic policy adviser to
the Carter administration. 45 Rubenstein’s current net worth is estimated at more than
$1 billion, though he has said that he himself has lost track of it due to the volume of
investments he has through the firm.46 Rubenstein’s properties include a Georgian-style
Bethesda, Md., home valued at $1.7 million, a 10,000-square-foot chalet in Beaver Creek,
David Rubenstein Colo., and a compound in Nantucket, Mass., large enough to accommodate 30 overnight
guests.47

William E. Conway: Prior to co-founding the Carlyle Group, he worked at MCI, where he
became senior vice president and chief financial officer. According to the trade journal The
Deal, “Conway green-lights or kills every one of Carlyle’s prospective LBO and venture
investments throughout the world.”48 Like Rubenstein, his current net worth is estimated
at more than $1 billion.49 In 1999, Conway purchased a 17,000-square-foot mansion built
on a seven-acre expanse with a view of the Potomac River. In 2005, he sold the property for
$24.5 million.50
Daniel A. D’Aniello: Prior to founding Carlyle, D’Aniello was a vice president at the
Marriott Corp. Press accounts also indicate that D’Aniello runs most of the day-to-
day operations of Carlyle. His current net worth is estimated at more than $1 billion.51
Louis V. Gerstner Jr.: Gerstner, the former CEO of IBM, was brought in as chairman
in 2003 as part of an effort to shift Carlyle’s reputation as “the CIA of the business world” Blackstone:
and to help the company build an organization that will outlast its founders.52 According to The Deals
D’Aniello, Gerstner is “one phone call away from every chief executive officer in the United
States.”53 In 2003, Forbes calculated Gerstner’s net worth at $600 million. Gerstner’s home Equity Office Properties:
in Greenwich, Conn., is valued at $12.2 million. $39 billion
2007
Printing Money Real estate investment trust55
n In December, 2005 Carlyle along with Clayton, Dubilier & Rice, and Merrill Lynch Tele Danmark:
bought out Hertz from the Ford Motor Co. Carlyle contributed approximately $750 $15.3 billion
million in equity. In June 2006, the sponsors paid themselves a special dividend 2005, (with KKR)
of $1 billion, and in November 2006, less than one year after buying the company, Phone company56
they took it public, while retaining a two-thirds stake in the company. For its $750 SunGard Data Systems:
million investment, Carlyle received proceeds totaling more than $400 million, while $11.3 billion
its remaining stake was worth $1.3 billion at the time of the IPO. That adds up to a 2005, (with Silver Lake Part-
return of 128 percent in less than one year’s time. 54 ners, Bain Capital, Goldman
Sachs Capital Partners, KKR,
Providence Equity Partners)
Corporate data and security57
The Blackstone Group
VNU Group (Nielsen):
Headquarters: New York, N.Y. $10 billion
2006, (with Carlyle, KKR, Thom-
The Company as H. Lee Partners, Hellman &
Founded in 1985, the Blackstone Group has more than $78 billion in assets under Friedman, AlpInvest Partners)
management.61 Blackstone has multiple lines of business in addition to buyouts, including Information and media company58
real estate, corporate debt funds, and hedge funds. Blackstone also provides mergers and
acquisitions and restructuring advice to corporate clients. In 2006, Blackstone raised a Michaels Arts and Crafts
Stores:
record $15.6 billion private equity fund, then later upped its size to $20 billion.62
$6 billion
Blackstone invests in a wide range of industries, including chemicals, communications, 2006, (with Bain Capital Partners
energy, entertainment, health care, insurance, lodging, manufacturing, technology, Arts and crafts materials
transportation, and waste management.63 Based on total amounts invested, the retailer59
bulk of Blackstone’s investments have been in consumer-related companies and the Freescale Semiconductor:
transportation sector.64 Either alone or as part of club deals, Blackstone has bought out $17.6 billion
such well-known companies as Michaels Stores, Madame Tussauds, and LaQuinta Inns.65 2006, (with Carlyle, TPG,
At present, the firm owns controlling stakes in 47 companies producing more than $85 Permira)
billion in revenues66 and that together employ more than 350,000 workers. 67 Semiconductor maker60
If Blackstone’s portfolio constituted one publicly traded corporation, it would hold spot No.
12 in the Fortune 500.

On March 22, Blackstone filed a registration statement with the SEC by which it intends
to sell a portion of its business to the public. Blackstone explained in its initial S-1 filing
that the public offering would allow it to tap a new permanent capital source to expand its
business, enhance its brand, provide an acquisition currency for strategic acquisitions, give
it a new way to incentivize its employees, and allow its founders to liquidate some of their
holdings in the company. Published reports indicate that Blackstone hopes to raise up to
$4 billion through the IPO.68
The Moneymakers
Blackstone has 57 senior managing directors. However, the key money-makers and
decision-makers are the company’s two founding partners and the firm’s president:
Stephen Schwarzman: Forbes Magazine ranked Blackstone co-founder Schwarzman
Source: The Blackstone Group
as No. 73 on their list of wealthiest Americans, estimating his net worth at $3.5 billion.69
He lives in a 35-room Park Avenue triplex purchased for $30 million, and also owns a
13,000-square-foot mansion in Palm Beach, Fla., a home in East Hampton, N.Y., and one
in Jamaica.70 This past February, Schwarzman threw a well-chronicled 60th birthday party
for himself at a cost of $3 million.71 However, Schwarzman has also indicated a concern
about growing inequality of wealth, “[T]he middle class in the United States hasn’t done as
Stephen Schwarzman
well over the last 20 years as people in the high end. Part of the compact in America is that
everybody’s got to do better.”72
Peter G. Peterson: Former chairman and CEO of Lehman Brothers, Blackstone co-
founder Peterson was Richard Nixon’s secretary of Commerce and now chairman of the
Council on Foreign Relations. He has spoken very publicly against the mounting federal
deficit. In a recent interview for the Financial Times, Peterson stated that middle-class
Americans were more concerned about their own futures than about the rich, suggesting
that “the American Dream still exists in the hearts and minds of the majority of
Americans.”73
Hamilton “Tony” James: James is widely seen as the heir apparent to Stephen
Schwarzman. Prior to joining Blackstone, James worked at Donaldson, Lufkin & Jenrette
(DLJ), an investment banking firm, where he demonstrated his financial acumen during
the merger mania of the 1980s. At that time, The Wall Street Journal characterized him
as a “merger whiz kid;” and by the age of 35, he was already earning more than $1 million
annually.74 However, $1 million was penny change to him. “I can’t resist the temptation to
say ‘$1 million sounds like a lot of money, but it’s really not,” he said. “No one’s going to shed
any tears for us. But the fact is, it’s easy to make $1 million and not accumulate a lot.”75
Printing Money
n In 2006, Blackstone collected $852 million in fund management fees (not including
the fees received for the Equity Office Properties deal). In 2005, Blackstone made $370
million in fund management fees.76
n In July 2004 Blackstone closed its purchase of German chemicals company Celanese
AG for $3.8 billion, of which Blackstone contributed $641 million in equity.77 Within
one year, in January 2005, Blackstone conducted an IPO and relisted Celanese
on the New York Stock Exchange, earning $3 billion—a 368 percent return on its
investment.78

Kohlberg, Kravis, Roberts & Company KKR:
Headquarters: New York, N.Y.
The Deals
The Company
KKR focuses on large deals,
Kohlberg, Kravis, Roberts & Co (KKR) is one of the oldest private equity firms having and was the fourth most-ac-
been founded in 1976, and is known for high-profile deals such as the hostile takeover of tive dealmaker in 2006—it
RJR Nabisco for $31 billion in 1989, inspiring the bestseller, Barbarians at the Gate. KKR closed on 13 deals worth an
continues to make headlines with announcements of leveraged buy-outs of well-known estimated $78 billion.79 KKR’s
largest deals include:80
companies such as First Data and Dollar General. In the first quarter of 2007, KKR has
announced more buyouts globally than any of its competitors.85 TXU:
$45 billion
According to the firm’s Web site, KKR has invested in 150 deals with a total aggregate 2007 (pending), (with TPG,
value of $279 billion.86 In 2006, KKR invested $6.9 billion in 12 companies and Goldman Sachs Capital Part-
participated in about $104 billion of deals.87 It is raising $20 billion for its global buyout ners)
fund and related entities. It owns 35 companies with a combined $95 billion in annual Electricity generation company81
revenue and more than 500,000 employees.88 HCA:
$33 billion
If KKR’s portfolio constituted one publicly traded corporation, it would hold spot No. 10 in
2006, (with Bain Capital, Merrill
the Fortune 500. Lynch)
For-profit hospital chain
The Money Makers
RJR Nabisco:
The two remaining founding partners,89 Henry R. Kravis and George
Source: Rick Maiman/Bloomberg News/Landov
$31 billion
Roberts, are cousins and make all the key decisions about company 1989
transactions. Forbes lists them both as being worth $2.6 billion, tied Consumer goods manufacturer
for No. 107 among the richest Americans.90
First Data:
Kravis is credited with being one of the key architects of the $28 billion
leveraged buyout where substantial amounts of debt are used 2007 (pending),
to purchase companies. James B. Lee Jr. of JPMorgan Chase Credit card processor
Henry Kravis
characterizes him as “the Roger Clemens of the industry. He was a VNU Group (Nielsen):
winner when he was 20 years old, and he is a winner in his 60s.”91 $10 billion
2006, (with Carlyle, Blackstone,
Printing Money Thomas H. Lee Partners, Hell-
man & Friedman, AlpInvest
n In January 2004 KKR bought MTU Aero Engines from Daimler Chrysler for $1.8
Partners),
billion with a total equity investment of $326 million.92 In June 2005, KKR floated
Information and media company82
MTU in an IPO and earned back $590 million while retaining 29 percent of the
company.93 They sold their remaining stake in January 2006 for an additional $570 Biomet:
$10.9 billion
million, for a total return exceeding 250 percent.
2006, (with Blackstone, Goldman
n In April of 2004, KKR acquired mattress-maker Sealy Corp. for approximately $440 Sachs Capital Partners, TPG)
million in equity and $1 billion in debt.94 Although KKR invested only $440 million Orthopedic devices maker83
of its own money in the deal, during the next two years it got back more than $250 SunGard Data Systems:
million (two special dividends, yearly management fees, a cancellation fee, and the $11.4 billion
sale of part of the company through an IPO) and still held a stake in the company 2005, (with Silver Lake
worth more than $900 million.95 Partners, Bain Capital, Gold-
man Sachs Capital Partners,
Blackstone, Providence Equity
Partners)
Corporate data and security84

TPG: TPG (formerly Texas Pacific Group)
The Deals Headquarters: Fort Worth, Texas
TXU: The Company

$45 billion Founded in 1992102, shortly after turning twice-bankrupt Continental Airlines into a
2007, (with KKR, Goldman serious contender in the airlines market, TPG is regarded as a turnaround expert and
Sachs Capital Partners) specialist in complex investments. In 2006, TPG was involved in $101 billion worth of
Electricity generation company96 deals.103 TPG’s latest fund is worth $15 billion.104
Harrah’s Entertainment:
TPG’s industry areas of focus are airlines, media and telecommunications, industrials,
2006
technology, and health care.105 Either alone or as part of club deals, TPG has bought out such
$27.8 billion (with Apollo
Management) well-known companies as the J. Crew Group, Neiman Marcus, Burger King, MGM, and
Casino entertainment Harrah’s Entertainment, the world’s largest gaming company. TPG currently is seeking to
company97 buy three international airlines, Qantas in Australia, and Alitalia and Iberia in Europe.
Freescale Semiconductor: TPG has lost at least one deal because of the risks posed by its management approach.
$17.6 billion In 2005, the Oregon Public Utility Commission rejected TPG’s bid for Portland General
2006, (with Carlyle; Blackstone; Electric, citing debt burden and quick flip as major risks of the deal. 106 In addition,
Permira) internal deal documents leaked to the press revealed TPG’s plans for “wholesale layoffs
Semiconductor maker98 and dramatic cuts in maintenance.”107
Univision:
At present, the firm owns companies producing more than $65 billion in revenues108 that
$13.7 billion
together employ nearly 300,000 workers. 109 If TPG’s portfolio constituted one publicly
2006, (with Madison Dearborn
Partners; Providence Equity traded corporation, it would hold spot No. 21 in the Fortune 500.
Partners; Thomas H. Lee Part-
ners and Saban Capital Group) The Moneymakers
Spanish-language media David Bonderman: Bonderman, a former civil rights attorney,110 is the
Bloomberg News/Landov
Source: Antoine Antoniol/
company99 co-founder and chair of TPG, and is seen as the primary force behind the
SunGard Data Systems: firm’s development. He is worth approximately $1 billion,111 He serves on
$11.4 billion the board of several companies as well as several environmental groups,
2005, (with Silver Lake Part- including The Wilderness Society, The Grand Canyon Trust, The World
ners; Bain Capital; Blackstone; Wildlife Fund, and the American Himalayan Foundation.
Goldman Sachs Capital
Partners; KKR, Providence James Coulter: A co-founder of TPG, Coulter started up the
David Bonderman
Equity Partners) California office of TPG. Coulter serves on a number of TPG portfolio
Corporate data and security100 company boards, including J. Crew Group Inc., Lenovo Group Limited, Neiman Marcus
Biomet: Group Inc. and Seagate Technology.112 He is co-chair of the Stanford University Development
$10.9 billion Steering Committee and a member of the Stanford Challenge Leadership Council.
2006, (with Blackstone, Goldman
Sachs Capital Partners, KKR) Printing Money
Orthopedic devices maker101 n T
PG made a sevenfold return on its $42 million investment in a one-year quick flip
of European air carrier Ryanair in the late 1990s. Michael O’Leary, president of
Ryanair, offered his take on what happened: “[Bonderman] was looking for dumb
companies that didn’t realize they were on to a good thing. He kind of raped us. He
got 20 percent for pretty much nothing. Sold us in ’97 and made a fortune.”113
n In October 2000, Petco was acquired by TPG and Leonard Green & Partners LP, in a
$600 million deal. TPG and Leonard Green invested $200 million in the deal, but then
collected an estimated $23.8 million in management fees, 114 and a $1.2 billion payout as
they made Petco public through a number of public offerings from 2002–2004, according
to allegations in a recently filed class action suit.115 In July 2006, TPG and Leonard Green
acquired Petco for a second time, in a $1.8 billion deal.116 Days after the acquisition, Petco
shareholders filed a class action law suit claiming “self-dealing and breach of fiduciary
duty” in the Superior Court of California. The plaintiffs charge Petco with blocking a
$33/share offer by PetSmart, and entering into a $29/share deal that benefits Petco
management and the buyout funds at the expense of shareholders.117 The case is pending.
Bain Capital, Inc.

Headquarters: Boston, Mass.
Bain :
The Deals
The Company
Bain was among the most
As of March 2007, Bain Capital had raised $13 billion in private equity leveraged buyout active funds in 2006; it par-
funds.124 Bain Capital Inc., formerly Bain & Co., is known for charging higher carried ticipated in 12 deals worth a
interest than average— 30 percent versus the standard 20 percent—and is a staple of the total of $85 billion.118 Notable
club deal circuit. Historically, nearly half of Bain’s deals have been club deals.125 Bain’s deals include:
club deals include Toys ‘R’ Us, with KKR and Vornado Realty Trust; AMC Entertainment, HCA:
with JP Morgan, Apollo Management, Carlyle Group and Spectrum Equity Investors, $33 billion
and Burger King with TPG and Goldman Sachs Capital Partners. Overall, its total assets 2006, (with KKR, Merrill Lynch)
under management were valued at $40 billion in 2007.126 Bain’s most recent fund, “Bain For-profit hospital chain119
Capital X,” raised $10 billion in 2006, $4 billion more than was originally anticipated.127 Michaels Arts and Crafts:
$6 billion
The Moneymakers 2006, (with Blackstone)
Joshua Bekenstein: A graduate of Yale and Harvard, Bekenstein continues Arts and crafts materials
Source: Clinton School Research Center
his ties to his alma mater, serving on Yale’s investment committee.128 retailer120
Bekenstein and his wife, Anita, are generous political donors, giving a total of Dunkin’ Brands:
$431,000 to various candidates and PACs between 2004 and 2006.130 $ 2.4 billion
2006, (with Carlyle and Thomas
Stephen Pagliuca: The grandson of a New York City shoemaker and
H. Lee)
the son of an army officer, Pagliuca is part owner of the Boston Celtics.
Fast-food restaurant chain121
Pagliuca was the lead partner on the HCA deal.131 Pagliuca’s net worth
is estimated to be $410 million.132 OSI Restaurant Partners Inc.:
Joshua Bekenstein
$3 billion,
Mark Nunnelly: Nunnelly was the lead partner in the Domino’s Pizza deal. 2007 (pending)
Restaurant chain, including
Money Sources Outback Steakhouse122
According to Fortune magazine, in 2006, Bain Capital raised $13 billion in buyout funds Clear Channel Communications:
largely from university endowments.133 Contrary to most other large buyout firms, Bain $26.7 billion
does not rely on major public pension funds as a significant source of capital. 2007 (pending), (with Thomas
H. Lee Partners)
Printing Money Telecommunications
conglomerate123
n A
s part of a club deal with Texas Pacific and Goldman Sachs, Burger King was acquired
by Bain Capital in 2002 for $1.5 billion, with Bain contributing an estimated $190
million in equity. Two dividend recapitalizations in 2005 and 2006 resulted in the
Burger King club participants recouping nearly all of their original equity investment.
In May 2006, the buyout group took Burger King public.134. Following a second share
offering in February 2007, Bain still owned 19 percent of the company worth more than
$560 million. According to The Deal, the two stock offerings and dividend recaps earned
Bain and the other Burger King investors four times their initial investment. 135
n According to Forbes, Bain and the other private equity firms that acquired Warner
Music Group in 2003 made $3.2 billion136 on a $1.25 billion investment in just a
little over a year, and the company was still losing money at the time.137 For more
information about the Warner Music deal, see the next page.

Behind the Buyouts:
A Look Inside Five
Private Equity Deals
1. Facing the Music: When corporate restructuring
leads to disappointing returns
The Thomas H. Lee Buyout of Warner Music
In her 2003 Grammy Award-winning song, “Cry,” Warner Music artist Faith Hill asked
if her partner could “pretend that he was feeling some pain.” Nine months later, Warner
employees were getting a preview of the pain that was going to come with the private
equity buyout of their employer. “Despite my personal fondness for the music business
as well as for all of our wonderful managers and music group employees,” said the Time
Warner CEO Dick Parsons, “I believe that this transaction is clearly in the best interests
of our company’s shareholders.”138
Paying $2.6 billion, just more than half of which was debt, a group led by the buyout firm
Thomas H. Lee and including Bain Capital, needed to quickly find ways to cut expenses
to cover the high cost of their deal, which closed in February 2004.139 Their plans for cost-
cutting quickly became clear: consolidating divisions, laying off 20 percent of the workforce
(1,000 employees), and ending contracts with nearly half of the artists on its roster.140 As a
result of the cuts, Warner shaved $240 million off its expenses and reduced net losses for
the year, although it was still losing more than $100 million a year.141
Despite these losses, the private equity group quickly recouped some of its investment. In
September of 2004 Warner Music returned $342 million to the investors and paid a dividend
of $8 million on their preferred equity taken from existing cash. Two months later, the
company took out a $700 million loan, financed with CCC+ junk bonds, of which $681 million
was used to pay additional dividends to the investors and repurchase a significant portion
of their common stock.142 At the same time, Warner Music faced a succession of subpoenas
from then-New York Attorney General Elliott Spitzer as part of his investigation of payola
schemes.143 Spitzer’s investigation led Warner Music to reach a settlement, in which it
agreed to stop giving financial incentives and promotional items to radio stations and their
employees in exchange for airtime. As part of the settlement, Warner Music admitted the
payoffs were improper, and agreed to abide by a higher standard.
The next spring, 18 months after the buyout, Warner announced it was making an initial
public offering, hoping to raise $750 million. Analysts and potential shareholders were
underwhelmed by the offering; the offering range of $22–$24 per share ended up selling
for just $16.40 per share.144 Some may have had little confidence in the long-term benefit
of the quick cost-cutting by management, others may have been put-off by revelations in
the initial filing that management had not fully addressed all the accounting problems
identified when the company first went private.145 Public investors’ concerns have been
borne out, as after nearly two years, the stock is still trading for virtually the same price at
which the shares were offered in the IPO, during a period when the S&P 500 has gained
more than 20 percent. 146 According to an article in Forbes, the buyout partners made $3.2
billion on a $1.3 billion outlay in just a little more than a year—on a company that was
losing money, and its good reputation.147

2. Broadcasting Losses:
An image of retirement insecurity
The “Zeus Holdings” Buyout of Intelsat
In 1969, millions of Americans were glued to their televisions, watching the first men
to walk on the moon. Those images were made possible by a relatively new company
called the International Telecommunications Satellite Consortium (Intelsat), originally
an intergovernmental organization created by more than 100 nations. In the following
decades, employees of Intelsat continued to improve telecommunications technology—
bringing Olympic Games, World Cup matches, and the royal wedding of Charles and
Diana to billions of television viewers.148 In 2001, Intelsat became a privately owned
company, and three years later was acquired for $5 billion by a consortium of private
equity firms—Apollo Management, Apax Partners, Madison Dearborn Partners and
Permira.149 The consortium invested $515 million of their own money in the deal and
called themselves “Zeus Holdings.”150
The new company went to work slashing labor costs, reducing the workforce by 18 percent
between June 2004 and September 2005151 and allegedly refusing to honor retiree medical
benefits, claiming that promises to retirees made by the previous board do “not create obligations
that are enforceable” against the present company, according to litigation filed in 2004.152 A
retiree reported to The Wall Street Journal that these benefits are worth $75 million.153
In March 2007, Intelsat agreed to provide a new health plan for the retirees, to cover their
“mental, dental, prescription drug and vision benefits.”154 Intelsat also agreed to reimburse
the retirees and their dependents for any out-of-pocket expenses exceeding the premiums
under the prior plan, if made during the gap in coverage.155 The settlement is subject to
approval of the court, which is expected in July 2007. Once approved, the retirees will also
be entitled to up to $200,000 in attorneys’ fees to cover the cost of the litigation.156
By the end of 2005, a little more than a year after the acquisition the cost cutting freed
up enough cash flow for the private equity consortium to add more debt to the company’s
balance sheet and pay themselves a total of $548.8 million in special dividends,157 more
than their original investment while still owning the company outright.
3. Not Fun and Games: The harsh consequences of

a crushing debt burden
The Bain Buyout of KB Toys
In December 2000, at the height of the busy Christmas shopping season, Bain Capital purchased
KB Toys in a highly leveraged buyout worth $300 million.158 Bain invested only $18.1 million of
its own money and financed the rest with bank loans and other assorted I.O.U.s.159
The early 2000s were a tough time for toy retailers, and competition was fierce from bulk
discount sellers like Wal-Mart and Target.160 Yet in April of 2002, KB Toys’ new owners
implemented a dividend recap—a second mortgage of sorts—to pay Bain and several KB
Toys executives a speial dividend of $120 million.161
KB Toys employees and creditors, on the other hand, were about to face some serious
financial challenges. In January 2004, KB Toys filed for bankruptcy protection. The new
year started off with announcements that at least 30 percent of stores would close and
nearly a third of the workforce would lose their jobs.162 Employees, creditors, and the
communities KB Toys served waited to learn where the cuts would take place.163 In the

end, nearly 600 stores closed and 4,000 employees received pink slips.164 Big Lots, from
whom Bain had purchased KB Toys, had to reveal to its shareholders that not only had
it not received payment on the $45 million note, but that it was also left holding the bag
on store leases that KB Toys defaulted on as it closed stores nationwide. As of the close of
2006, some landlords were still waiting for payment of old rents.165
In an action to recover the note and other damages, Big Lots alleged that Bain Capital’s
2002 dividend recap led to the company’s bankruptcy, characterizing the practice as an
“unjustified return on [their] investment in excess of … 900 percent in a mere 16 months.”166
Bain Capital and KB Toys executives cited the difficulty of competing with the discount
stores as the cause of the company’s woes.167 The Delaware state court dismissed Big Lots
case, finding that Big Lots was limited to bankruptcy proceedings to enforce this claim.
KB Toys emerged from bankruptcy in 2005 when a new owner—another private equity
firm—invested $20 million.168 For the 4,000169 former KB Toys employees who lost their
jobs, it was a harsh lesson in the game of private equity buyouts.
4. Hertz So Good: The hidden costs of a “quick flip”

The Carlyle/Clayton Dubilier & Rice Buyout of Hertz Car Rental
Potential investors are told that one of the strengths of private equity
What is a dividend investments is that they are not beholden to the tyranny of short-term returns
like the public markets. “Private equity firms are not under public scrutiny …
recapitalization and so they can focus on long-term business growth,” they are told.171 And so when
what are its risks? a consortium of private equity firms, including industry giant the Carlyle
In a dividend “recap,” private equity investors Group, Clayton, Dubilier & Rice (CD&R), and Merrill Lynch, bought Hertz,
take out new debt on a company and then the car rental company, from the Ford Motor Company in the autumn of 2005
use all or part of this additional cash to pay
for $15 billion, it was expected that they would formulate a long-term plan to
themselves a special dividend. Thus, the divi-
dend comes from debt and not from earnings,
build on the value of this household brand name.172
and the debt is used at least partially for a But the firms had some short-term plans as well. Carlyle partner and fellow
payout rather than investing in the company
buyout firm CD&R realized that they could “push the boundaries of how much
to increase its value.
a rental fleet could be securitized by many billions of dollars.”173 By leveraging
According Standard & Poor’s, the volume of
the company’s key asset with an eye on “flipping” or selling the company for
dividend recaps increased from $3.9 billion in
2002 to $40.5 billion in 2005, with the volume a profit, the firms jeopardized the company’s credit rating: Standard & Poor’s
for the first six months of 2006 up an additional downgraded the company’s bonds to junk status.174 Just six months after the
23 percet over the equivalent period in 2005. In deal was finalized, the new owners had Hertz take out another loan for nearly
a recent survey of 75 private equity firms with $1 billion in order to pay themselves a special dividend.175
funds of $500 million or more, 97 percent of
respondents stated that they planned to use A few weeks later—less than a year after buying out the company from
recaps in portfolio companies in 2007 and 75 Ford—Hertz announced that it would once again be going public.176 In its IPO
percent expected to increase their usage. filing, Hertz stated that money from the public offering would be used to pay
The benefits a recap provides to the private off the loan for the special dividends.177
equity firm include: a quick return of funds
to limited partners, thus increasing its internal The November IPO raised $1.3 billion, while the buyout group continued to
rate of return, and the ability to cash out own more than 70 percent of Hertz.178 The buyout firms used most of what
equity without selling the company or offering was left after paying off Hertz’s $1 billion loan to pay themselves another $260
an IPO. However, by adding debt to already
million in special dividends.179
highly leveraged companies, the dividend
recap increases a company’s vulnerability to “Fast-buck artists” is the name that Business Week gave to the buyout
potential operational fluctuations or external consortium in their report on the Hertz IPO.180 But while the buyout firms
changes that could result in either bankruptcy
were paying themselves special dividends, profits at the company fell sharply
or restructuring.170
due to the increased debt. For 2006, Hertz reported an increase in revenue of
nearly 8 percent but a decline in net income of two-thirds due to an 80 percent

increase in total interest payments.181
And what became of Hertz’s employees? Just a few days into 2007, Hertz announced it
would be cutting jobs as part of its “productivity and efficiency” initiative.182 Altogether in
the first two months of 2007, Hertz announced that it was eliminating 1,550 jobs, which
represent close to 5 percent of the 31,500 workers Hertz employed at the end of 2006.183
In March 2007 , CEO Mark Frissora added that only one of every two workers who left
the company was being replaced and that Hertz would be announcing more “layering and
restructuring” initiatives later this year.184
5. Come Fly With Me: Creating opportunities

for workers
The Onex Buyout of Three Boeing Plants.
McAlester, Okla., is a community of 18,000 just off the Indian Nation Turnpike about 90
miles due south of Tulsa. A former coal town, McAlester is now best known as the home of
the Oklahoma State Penitentiary, the McAlester Army Ammunition Plant and one of two
former Boeing plants in the state. McAlester’s residents are by no means wealthy—the
median household income is about $29,000 a year. The manufacturing jobs like the 300
that exist at the aircraft parts plant pay decent wages in a town where most have a high
school diploma but few finish college.185
In 2005, the stability of those jobs was in question. Boeing announced that it was selling
the McAlester plant, as well as one in Tulsa and another in Wichita, Kan.,, to Onex, a
private equity firm based in Toronto. Backed by an agreement with Boeing to subcontract
to these plants major subassemblies of just about all its aircraft, Onex promised to invest
$1 billion to modernize the plants and expand employment.186 But after the deal was made,
Onex would not guarantee that it would keep all 9,080 jobs at the three plants (7,800 in
Wichita, 1,060 in Tulsa, and 220 in McAlester).187 Onex engaged in contentious bargaining
with the plants’ largely union workforce over job protections, and the protection of wages
and benefits. The workers and their communities were concerned about the immediate
impact of the deal on them.
The contracts that Onex eventually offered most workers called for immediate pay cuts
and higher medical insurance premiums, but also shares of stock in the new company and
promises of future raises. 188 Layoffs of 800 workers in Wichita and 256 of the workers at
the Oklahoma plants added to the tension and uncertainty.189
By late 2005, all the contracts were settled. They included various concessions in exchange
for stock in the new company.190 With booming aircraft orders in 2006, the company—now
named “Spirit AeroSystems”—added new positions and by year-end the workforce had
grown to 12,100 (10,000 in Wichita, 1,800 in Tulsa, and 300 in MacAlester) -- a 33 percent
increase over the number of jobs at the time Onex bought the plants.191
In November 2006, Onex took Spirit public, allowing the buyout firm to recoup the money
it had paid to Boeing—and providing a windfall to workers. McAlester’s mechanics learned
in early December that they could expect a check for $20,000 and would retain 1,000
shares of stock—worth more than $30,000.192
Workers who persevered through a sometimes difficult transition finally came out ahead.
“It’ll be real good for the community,” Mike Haskins, chair of the mechanics bargaining
unit, told the McAlester News Capital. “There’ll be a lot of extra cash in town around
Christmas. A lot of it will go into the community.” Haskins added that “some people have

been at Spirit for 30 years. We’ve got a really good crew. It reflects the work ethic for all
the people that work there that the company has done so well.”193
Despite uncertainty, pay cuts and even layoffs for some workers, this is one private
equity deal that in the end found a way to provide new economic opportunities and
tangible benefits for workers. More new jobs were created, and a community that long
had contributed to building a company’s success got something back in return.

CONCLUSION
T he buyout deals and money-generating strategies that

are generating immense wealth for the private equity
buyout industry and many of its investors can have harsh
consequences for workers and the companies they buy and sell.
For the artists and other clients of Warner Music, the corporate
restructuring driven by the Thomas H. Lee buyout hollowed-out a
once-proud music company, harming its image in the music industry
and potentially reducing its long-term value.
For the retirees at Intelsat who spent their careers building the value
of that company, for the 4,000 KB Toys employees laid off after the
company declared bankruptcy under the weight of a crushing debt
load, and for the Hertz employees laid off in the wake of a lucrative
quick flip, private equity corporate strategies uprooted lives and
negatively impacted hardworking families.
In every case, the workers themselves had almost no voice in the
process, little information about their new employers, and no role in
developing the plans that were going to change their lives for the worse.

The biggest missed opportunity, however, may be that for all the hundreds of millions of
dollars in fees and profits taken out in these deals, the workers who remain at Hertz or
Warner Music received no increases in pay or benefits, or even a more generous 401(k)
contribution from their company as part of these deals. The same goes for the contract
workers—the janitors, security officers, food service workers, and others—who provide
valuable services every day and whose jobs are controlled by these companies, but who are
paid mostly poverty level wages and more often than not have no affordable health care,
sick days, or retirement benefits of any kind.
In an industry where millions, even billions, are changing hands on a daily basis,
enriching a small group of executives, the hundreds of thousands of portfolio company
employees and contract workers have no seat at the table in these deals and do not receive
any of the benefits, despite their everyday hard work that contributes to building the value
of these companies.
Examples such as the Onex buyout of the Boeing plants, however, show that private
equity firms, if they do choose to work together with workers and other stakeholders, can
use their business model to increase economic benefits for workers, while still turning
healthy profits.
And while no reliable quantitative data exists to adequately evaluate the impact of private
equity buyouts on overall job creation, it is clear that the growing influence of the private
equity buyout industry on the American economy calls for a much closer look at the impact
that its business practices have, not only on workers, but on communities and other
stakeholders affected by corporate buyouts.
With little information and a lack of transparency surrounding the buyout industry, there are
few available avenues for workers, community organizations and others to engage with the
private equity firms that increasingly control the companies that provide important services in
our communities, sell consumer goods to our families, and employ millions of Americans.
Private Equity: The Opportunity

At the same time, the incredible wealth that exists in the private equity buyout industry
presents a historic opportunity to help create real opportunities for the millions of working
people who are being shut out of the American Dream.
There is more than enough wealth in the buyout business for the buyout firms to continue
to prosper while also adapting their existing business model to expand opportunities to
benefit workers, communities, and the nation.
Improving the jobs of millions of Americans whose companies are involved in corporate
buyouts will have a major impact on reducing the income inequality that is weakening our
country and undermining our democracy.
With these concerns and opportunities in mind, SEIU proposes principles for the private
equity buyout industry:

SEIU Principles for the Private Equity Buyout Industry
1. The buyout industry should play by the same set of rules as everyone else.
n The industry should provide transparency and disclosure about their businesses, their
deals, their income, their plans for the companies they buy and sell, and the risks of
the debt they load onto portfolio companies
n The industry should invest in the health, security, and long-term prosperity of
America by supporting equitable tax rates and the elimination of loopholes that
increase the tax burden on working Americans
n The industry should work to build confidence in the securities markets by eliminating
conflicts of interest and other potential abuses in their deals
2. Workers should have a voice in the deals and benefit from their outcome.
n Workers should have a seat at the table when deals are being made
n Private equity deals should create economic opportunities that align the long-term
interests of everyone that builds the value of a company, from direct employees and
contract workers to senior management
n Workers should have paychecks that can support a family
n Workers should have quality, affordable health care coverage
n Workers should have secure retirement benefits
n Workers should have a voice at work—meaning the freedom to join a union using
majority sign-up without interference from any party
3. Community stakeholders should have a voice in the deals and benefit from
their outcome.
n Buyout firms should play a proactive and constructive role in the communities
affected by their deals
n Community stakeholders should be involved as deals are being made
n The private equity buyout industry and community stakeholders should use wealth
generated by deals to improve the quality of life, the environment, the health, the
safety, and the long-term stability of communities

Endnotes
assets; A story of excess. Business Week, October 30,
1 Forbes, “Deal Engines on a Roll” 4/2/07 2006.
2 Emmanuel Saez, UC Berkeley and Thomas Piketty 17 The Center for Entrepreneurial and Financial
of Paris School of Economics Studies found that 33 percent of the buyout-financed
3 The New York Times, “Income Gap Is Widening, firms it studied cut back on staff; see Employment
Data Shows,” March 29, 2007 Contribution of Private Equity and Venture Capital in
Europe, European Private Equity and Venture Capital
4 For a glossary of investment terms, see http://www.
Association, November 2005.
calpers.ca.gov/index.jsp?bc=/investments/policies/
glossary/browse-full.xml&theletter=L&theclass=1#119 18 Phil Thornton, Inside the Dark Box: Shedding
Light on Private Equity, The Work Foundation,
5 Returns can vary depending on which firm is
March 2007.
involved, what kind of investments are made, and
the size of the fees that investors must pay. Stephen 19 Creating New Jobs and Value with Private Equity,
N. Kaplan and Anoinette Schoar, “Private equity A.T. Kearney, 2007
performance: returns, persistence and capital flows,” 20 Center for Entrepreneurial and Financial Studies,
Journal of Finance, vol. 60, no.4, pp. 1791-1824; Employment Contribution of Private Equity and
Julie Froud and Karel Williams, “Private equity and Venture Capital in Europe, European Private Equity
the culture of value extraction,” Centre for Research and Venture Capital Association, November 2005.
on Socio-Cultural Change, Working Paper 31, 21 Why is the 20 percent assumption of organic
February 2007, pps. 7-8. growth problematic? Say a buyout firm acquires
6 James Mawson and David Rothnie, “Blackstone a company with 100 employees. Then it acquires
borrows $80bn: Private equity group to use Company B with 50 employees and merges it with
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flotation,” Financial Times, March 26, 2007. people, leaving it with 120 employees. No new jobs
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borrows $80bn: Private equity group to use since Company A has grown no more than 20 percent,
partnership structure to pay almost no tax after these jobs would show up in the CFES study as new
flotation,” Financial Times, March 26, 2007. jobs.
8 Strategics Should Borrow Moves From PE’s 22 Andrew Taylor and Chris Bryant, “Buy-out Study
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137 The private equity group paid $2.6 billion for
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140 “Warner Music Group announces restructuring,” 156 Agreement of Settlement of Consolidated Erisa
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189 Dion Lefler, “Pay Fears, Lost Co-Workers Put
176 “Hertz Global Holdings, Inc. Announces the Machinist in Somber Mood,” The Wichita Eagle, May
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177 Hertz Global Holdings, S-1, filed with SEC, July 190 Robert Evatt, “Spirit mechanics approve
14, 2006, p. 39 contract,” Tulsa World, October 29, 2005; James
178 Hertz Global Holdings, 10-K, filed with SEC, Beaty, “Spirit passes new contract,” McAlester News-
March 30, 2007; see p.55.for the amount raised; see Capital, October 23, 2005
p. 1 for the amount of equity retained by the buyout 191 D.R. Stewart, “Work-Force Growth: 1,800 Now
firms. Employed: Spirit still hiring,” Tulsa World, January
179 Ibid., p. 55 13, 2007
180 “Buy It, Strip It, Then Flip It,” Business Week, 192 Trevor Dunbar, “Spirit mechanics get windfall,”
August 7, 2006 McAlester News Capital, December 2, 2006
181 Hertz Global Holdings, 10-K, filed with SEC, 193 Ibid.
March 30, 2007, pp. 78-79
182 “ Hertz Announces First Phase of Productivity
and Efficiency Initiatives,” Hertz Press Release,
January 5, 2007
183 Hertz Global Holdings, 10-K, filed with SEC,
pp. 21-22
184 Hertz Fourth Quarter 2006 Earnings Conference


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Behind

The Top Five Private Equity Buyout Firms................................................. 22

“Behind the Buyouts:” A Look Inside Five Private Equity Deals........... 28

INSIDE THE WORLD OF PRIVATE EQUITY 3

L argely unknown outside the financial world, an industry

INSIDE THE WORLD OF PRIVATE EQUITY 5

The Top Five Private Equity Buyout Firms

“Behind the Buyouts:” A Look Inside Five Private

6 BEHIND THE BUYOUTS

SEIU Principles for the Private Equity Buyout Industry

n Workers should have quality, affordable health care coverage

n Workers should have secure retirement benefits

INSIDE THE WORLD OF PRIVATE EQUITY 7

L argely unknown outside the financial world, an industry

INSIDE THE WORLD OF PRIVATE EQUITY 9

Incredible Wealth, Incredible Disparity

10 BEHIND THE BUYOUTS

INSIDE THE WORLD OF PRIVATE EQUITY 11

P rivate equity buyouts are generally conducted by private

INSIDE THE WORLD OF PRIVATE EQUITY 13

How Money is Made

14 BEHIND THE BUYOUTS

Impact of debt levels on LBO returns

Private Equity and Taxes

INSIDE THE WORLD OF PRIVATE EQUITY 15

2.Taxing carried interest as capital gains instead of income

16 BEHIND THE BUYOUTS

INSIDE THE WORLD OF PRIVATE EQUITY 17

18 BEHIND THE BUYOUTS

INSIDE THE WORLD OF PRIVATE EQUITY 19

20 BEHIND THE BUYOUTS

2/24/2007 TXU Corporation* KKR,TPG 45 7,262

04/02/2007 First Data Corp KKR 29 29,000

Carlyle, Goldman Sachs,

Cerberus Capital, Kimco

11/13/2005 Hertz Carlyle, CD&R, Merrill Lynch 15 31,500

INSIDE THE WORLD OF PRIVATE EQUITY 21

Carlyle: The Carlyle Group

22 BEHIND THE BUYOUTS

INSIDE THE WORLD OF PRIVATE EQUITY 23

24 BEHIND THE BUYOUTS

INSIDE THE WORLD OF PRIVATE EQUITY 25

TXU: The Company

Bain Capital, Inc.

INSIDE THE WORLD OF PRIVATE EQUITY 27

28 BEHIND THE BUYOUTS

3. Not Fun and Games: The harsh consequences of

INSIDE THE WORLD OF PRIVATE EQUITY 29

4. Hertz So Good: The hidden costs of a “quick flip”

30 BEHIND THE BUYOUTS

5. Come Fly With Me: Creating opportunities

INSIDE THE WORLD OF PRIVATE EQUITY 31

32 BEHIND THE BUYOUTS

T he buyout deals and money-generating strategies that

INSIDE THE WORLD OF PRIVATE EQUITY 33

Private Equity: The Opportunity

34 BEHIND THE BUYOUTS

n Workers should have quality, affordable health care coverage

n Workers should have secure retirement benefits

INSIDE THE WORLD OF PRIVATE EQUITY 35

n Workers should have quality, affordable health care coverage

n Workers should have secure retirement benefits

2.Taxing carried interest as capital gains instead of income

3. Not Fun and Games: The harsh consequences of

4. Hertz So Good: The hidden costs of a “quick flip”

5. Come Fly With Me: Creating opportunities

n Workers should have quality, affordable health care coverage

n Workers should have secure retirement benefits