News : Private equity moves to cash in on Washington policy shops

Tuesday, April 11, 2023

Private equity moves to cash in on Washington policy shops

Apr 11, 2023

Editor’s note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our subscribers each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro.

Wall Street is falling in love with Washington. Well, at least in one regard.

Private equity firms are buying up stakes in Washington lobbying and public affairs shops in a bid to cash in on boom times for the strategic communications industry. As corporate boards face a barrage of social and political controversies — to say nothing of actual policy concerns — a growing number of buyout firms are turning their eyes to the Beltway consulting class as a potential cash cow for their investors.

“To me, it feels like investing in McKinsey in the 1990s,” Philipp Freise, the co-head of Kohlberg Kravis Roberts’s European private equity business, told MM on Monday.

KKR announced this morning that it was buying a minority stake in FGS Global, a large government affairs, communications and advisory firm with offices in Washington, New York, Brussels and two dozen other locations across the globe. The investment, which values the business at $1.4 billion, represents a bet that C-suites are now as focused on keeping their companies out of political quagmires as they are advancing the bottom line. (KKR, an investment firm, holds a significant stake in Axel Springer, POLITICO’s parent company.)

“Our politics have become more unpredictable and that impacts the legislative and regulatory world. Financial markets are chaotic and unpredictable,” Michael Feldman, a partner and co-chair of FGS Global’s North America business, said in an interview.

That’s forcing executives to account for how shifting social and political winds can affect their customers, investors and employees.

“An issue that may not be core to the business can become core to the business overnight,” Feldman said.

KKR isn’t the first private equity firm to take an interest in communications and policy businesses.

Falfurrias Capital took a majority stake in Penta – then known as Hamilton Place Strategies — and has since merged more than a half-dozen public relations and research firms into the rebranded company. Seidler Equity Partners, a 30-year-old firm based in Los Angeles, has been scooping up minority stakes in several Washington-based polling, consulting and lobbying firms. Abry Partners earlier this year acquired a minority stake in Precision Strategies.

Those Wall Street firms, though certainly formidable, are much smaller than KKR — which now controls more than $500 billion of assets worldwide. And the deal’s price tag is certain to compel the CEOs of some Washington policy shops to call their bankers and gauge their worth.

Responding to a potential crisis “used to be a once in a three-year event. It feels like it’s every three weeks now,” Freise said. “This has become boardroom priority number one.”

IT’S TUESDAY — And your MM host is starting to think he got into the wrong line of business. Send tips, suggestions and gossip to Sam at ssutton@politico.com and Zach at zwarmbrodt@politico.com.

GO INSIDE THE 2023 MILKEN INSTITUTE GLOBAL CONFERENCE: POLITICO is proud to partner with the Milken Institute to produce a special edition "Global Insider" newsletter featuring exclusive coverage, insider nuggets and unparalleled insights from the 2023 Global Conference, which will convene leaders in health, finance, politics, philanthropy and entertainment from April 30-May 3. This year’s theme, Advancing a Thriving World, will challenge and inspire attendees to lean into building an optimistic coalition capable of tackling the issues and inequities we collectively face. Don’t miss a thing — subscribe today for a front row seat.

Driving the Day

The IMF will release its economic outlook at 9 a.m. and its global financial stability report at 10:30 a.m. … Treasury Secretary Janet Yellen will hold a press conference at 11:30 a.m. … Consumer Financial Protection Bureau Director Rohit Chopra speaks at a Washington Post event at noon … The Peterson Institute for International Economics will host remarks from South African Reserve Bank Gov. Lesetja Kganyago at 12:30 p.m. and Japan’s Vice Minister of Finance Masato Kanda at 3 p.m. … The Richmond Fed is hosting its two-day annual conference on rural economies starting at 1 p.m. … World Bank President David Malpass will discuss global debt at 1 p.m. … Chicago Fed President Austan Goolsbee speaks at 1:30 p.m. … CFTC Chair Rostin Behnam to deliver a keynote at NCUA’s Capital Markets Summit at 2 p.m.

"The tension could be cut with a knife" — China’s ascendance as a key source of development financing for the emerging world has long been a point of tension with the West. As global leaders debate offering more debt relief for developing economies at this week’s IMF-World Bank meetings, frustration over how to cajole China’s government into writing down some of the country's loans is spilling into the open, our Adam Behsudi reports.

"Treasury Secretary Janet Yellen and other officials are growing adamant that what they view as China's hardline approach to lending is squeezing countries and threatening to deepen poverty in Africa and elsewhere. Yet the conflict also highlights a new potential fault line in the global economic order: China is pursuing a parallel system of development finance that challenges the Western model of providing assistance and negotiating debt relief with borrowers, which has been dominant since the end of World War II...”

"'We are moving to more of a bipolar system with a very significant creditor to a great many countries bent on doing things bilaterally with its own rules,’ said Carmen Reinhart, who served as the World Bank’s chief economist until last year and has directly participated in debt-relief talks. ‘That rift is there… the tension could be cut with a knife.’”

Yellen: All is well — Yellen plans to tell financial regulators at the IMF-World Bank conference that “the U.S. banking system is on solid ground despite a string of failures that rattled global markets,” Zach reports. Yellen’s press conference comes “amid meetings with world leaders related to bolstering the global economy, revamping the World Bank and similar institutions, pushing for World Bank nominee Ajay Banga, rallying allies on Russia sanctions and tackling the indebtedness of developing countries.”

WHITE GLOVE TREATMENT — CNBC’s Chelsey Cox: “Two top progressive lawmakers questioned whether Silicon Valley Bank offered its largest depositors unusually cushy treatment … Sen. Elizabeth Warren (D-Mass.) and Rep. Alexandria Ocasio-Cortez (D-N.Y.) sought details on what they called the ‘cozy’ relationship between SVB and 14 of its biggest depositors.”

This is hardly only a progressive concern. Sen. J.D. Vance (R-Ohio) hammered SVB’s “goodies” for top venture capitalist customers in a hearing last month.

LAWMAKERS TRADE ON SVB — WSJ’s Rebecca Ballhaus: “Two lawmakers reported trades in bank stocks last month as they worked on government efforts to address fallout from two of the largest bank failures in American history … Rep. Nicole Malliotakis (R., N.Y.) bought stock in a regional bank before a subsidiary agreed to take over Signature Bank’s deposits following its closure. Days before she bought the stock, she said she met with financial regulators to discuss the bank’s closure. Rep. Earl Blumenauer (D., Ore.) reported three trades in bank stocks as he co-sponsored legislation seeking to strengthen restrictions on financial firms in the wake of the bank failures.”

WHERE WERE THE AUDITORS? — The WSJ’s Jean Eaglesham: “The current banking crisis is the first big test of critical audit matters, a measure designed to help investors decode risks and uncertainties buried in financial statements … So far, though, critical audit matters have failed to shed light on issues that have caused a collapse of confidence among depositors and investors in many small and midsize banks.”

Regulatory Corner

DOJ: Labor collusion still a priority — Our Josh Sisco reports from Salt Lake City: The Justice Department will continue to bring criminal cases challenging collusion in labor markets, despite a series of losses in the last year, the antitrust division’s head criminal prosecutor said at a conference on Monday.

“There's lots of things that operate that make obtaining our convictions more difficult,” said the DOJ’s Manish Kumar., adding that many defendants in past and pending cases have no criminal history and a "sense, perhaps, that what they were doing was wrong, or dishonest but they didn't know, necessarily, that they were breaking the law."

“We're certainly learning from this," Kumar added.

TROUBLE — Reuters: “A Goldman Sachs & Co unit has agreed to pay $15 million to settle U.S. Commodity Futures Trading Commission (CFTC) charges that it failed to make proper disclosures and communicate fairly to swap customers.”

In the markets

THE CRUNCH HAS ARRIVED — Reuters’s Howard Schneider: “After a year of racing along a virtually unfettered path to higher interest rates, the Federal Reserve is facing its first significant pothole as the decisions made in hundreds of bank executive suites will either add up - or not - to an economy-shaping drop in lending.”

— Meanwhile, in Europe “the cracks are starting to show” in commercial real estate, according to the FT.

Jobs Report

Ryan Zamarripa is now a management and program analyst at the U.S. Economic Development Administration. He most recently was a senior professional staffer for the House Select Committee on Economic Disparity and Fairness in Growth. — Daniel Lippman

Drew Benson is now head of communications for the Americas for the Sumitomo Mitsui Banking Corporation. He most recently was head of public affairs for U.S. retail banking and Citi Bike at Citi and is an alum of Credit Suisse and Bloomberg News. — Daniel Lippman

Crypto

IS THAT BAD? — The WSJ’s Caitlin Ostroff and Vicky Ge Huang: “FTX’s failures are rooted in ‘hubris, incompetence, and greed,’ the crypto exchange’s new management team said in a report outlining scathing details about the lack of financial controls and record-keeping under founder Sam Bankman-Fried … ‘We sometimes find $50m of assets lying around that we lost track of; such is life,’ Mr. Bankman-Fried said in an internal communication.”

BITCOIN AND THE GRID — The NYT’s examination of nearly three dozen large-scale crypto mining operations found that they use around the same amount of energy as three million households. “It is as if another New York City’s worth of residences were now drawing on the nation’s power supply,” writes Gabriel Dance.

SAFETY NET — Bloomberg’s Hannah Miller, Vildana Hajric and Olga Kharif: “Billionaires Tyler and Cameron Winklevoss dipped into their own pockets to support their crypto exchange Gemini Trust Co. … The twins made a $100 million loan to Gemini recently.”

STEP INSIDE THE WEST WING: What's really happening in West Wing offices? Find out who's up, who's down, and who really has the president’s ear in our West Wing Playbook newsletter, the insider's guide to the Biden White House and Cabinet. For buzzy nuggets and details that you won't find anywhere else, subscribe today.