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Tuesday, 15 July 2014 00:00

Private Equity Fees under Scrutiny

(New York)

The nature of Private Equity fees and the way they are charged is coming under heavy focus by regulators, who are concerned that private equity houses are inappropriately bilking their portfolio companies out of millions of dollars. In addition to fees that funds charge their investors, the firms also gain sometimes hundreds of millions of consulting and “monitoring” fees in relation to their ownership, charged to the companies they own. The industry has been long scrutinised for the heavy debt burdens they put on the companies they own, as well as the tax loopholes that private equity fund managers exploit, but now the concern is shifting to whether the firms are netting millions in fees which compromise their ownership position. Firms often have in-house consulting arms which charge millions to owned companies for services that the companies cannot easily say no to, and funds often charge compulsory “monitoring” fees of $20m or more, which regulators say is often a fee for nothing. Worse yet, many funds stand accused of not passing the fees onto their investors, but keeping them entirely for themselves.

FINSUM: It looks as though the private equity industry is beset by another scandal, and one that looks likely to lead to further regulation of the space.


A new and disruptive wave of labour strikes is hitting the South African economy, and this time 200k workers have stopped work and begun demonstrating in the automotive sector. Ford and Toyota has both been severely hit by the strikes and Ford has been forced to shut one plant in the country, while Toyota has shuttered two of its four lines in its Durban plant because of a lack of workers and components. General motors and BMW have also been hindered by the unrest, with both scaling down their operations. The strikes are a continuation of a five-month labour disturbance in the South African mining sector, where platinum workers held violent protests. The South African economy shrunk 0.6% in the first quarter as a result of the strikes, and the government now says the current wave of disruptions is threatening to shave off a third of the entire manufacturing sector. Thus far, the strikes are mainly occurring in automotive component suppliers rather than at large automakers. South Africa is home to nearly all of the world’s top auto companies and exports 276k cars per year.

FINSUM: South Africa’s economy seems unable to ever get fully back on track. The country needs to find a way to amend its labour issues if it wants to put its economy back on solid footing.

Tuesday, 15 July 2014 00:00

US Loses WTO Battle with China


After an arduous two-year court battle, the World Trade Organization has ruled decisively in favour of China over a number of trade disputes between Washington and Beijing. China has complained bitterly about high tariffs imposed by the US on Chinese goods, particularly in the solar and steel industries. The US imposed the tariffs as a way to offset “overt” and “hidden” subsidies which made Chinese costs distortingly low and put US companies out of business. Now, in considering the case, the WTO has ruled that the US’ tariffs were inappropriate because they do not accept the US’ argument that the subsidies given to Chinese companies make them “public bodies”, an important but narrowly defined term in the WTO’s eyes. China says is hopes the US will abide by the ruling and abolish its punitive tariffs. The US also lost a similar case with concern to India, where the US used the same argument about the Indian steel industry.

FINSUM: The US has now lost a ferocious trade battle just at a time when the US and China are meeting to discuss future relations. Will Washington give in and abolish the tariffs, potentially wiping out the thriving domestic solar industry, or will it defy the WTO?


In the first instances of their kind nationally, the state of Illinois is bringing cases against two debt relief companies, who they say swindled student loan debtors into high fees with no services. Alongside the massive rise in student debt, which now saddles a record number of Americans with more than $20,000 in debt, and has reached a total of $1 tn nationally, has come a boom in debt relief companies which offer to help debtors for large upfront fees. The companies have shifted from focusing on mortgage and credit card debt to student loan debt, as the market is growing much faster. However, Illinois regulators say the companies charged hundreds in upfront fees and $50 per month afterward for services never rendered. The regulator also claims the companies faked association with federal debt relief programs and charged debtors for services which would have been free through the government. 50% of recent graduates are now unemployed in the US.

FINSUM: Student debt is a large and growing issue in the US. Oddly, young people, who had nothing to do with the economic meltdown in 2008, are those suffering most from the Great Recession as many graduate with high debts and are now unemployed.

Monday, 14 July 2014 00:00

Municipals: Kansas’ Tax Disaster


When Kansas’ tax authority finished tallying its income for 2013 it realised that it had taken in an eye-watering $338m less than it did the year before. This gap, which is equivalent to 8% of the state’s budget will force Kansas to dip into a reserve fund which will run dry next year. The reason behind the lower income was an ill-advised tax cut in 2012, led by Governor Sam Brownback, which cuts the state’s top income tax bracket by a quarter and eliminated all taxes on business profits reported on individual income returns. Brownback, a Republican, touted in 2012 that the cuts would pay for themselves because of the economic growth they would bring about. Yet, the state is one of only five in the US to lose employment over the last half year, and average earnings are down since 2012. Now the state is being forced to cut spending in all areas, including in education, as it must adjust to its new income level. Moody’s downgraded the state for the first time in 13 years in April, citing the tax cuts and fiscal mismanagement as the reasons.

FINSUM: These tax cuts have turned into a real disaster for Kansas, as the state has failed to attract businesses and growth. They will likely to have to reverse them if they want to set their financial house in order.

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