PE Firms Give up Equity Stake in Caesars Entertainment to Settle Bankruptcy: Who Are the Real Losers?

September 30, 2016

On September 26, Apollo Global Management and TPG Capital reached an agreement with disgruntled creditors that is expected to allow bankrupt casino operator, Caesars Entertainment, to emerge from bankruptcy. The private equity firms gave up their battle to salvage something from their $30 billion investment in the casino company. Creditors claimed that the PE firms had shifted assets from Caesars Entertainment to its parent company, which is publicly traded and not bankrupt. The bankruptcy settlement originally proposed by Caesars did not require any contribution from the parent company to the restructuring of its bankrupt chief operating unit.

In the new proposed settlement, Apollo and TPG will give up their 14 percent stake in the parent company, worth $950 million. What caused the change of heart and led the two companies to give up their investment? Shades of Donald Trump! The bankruptcy judge ruled that Apollo co-founder Marc Rowan and TPG co-founder David Bonderman would have to hand over details of their personal finances to the creditors. It was worth nearly $1 billion not to make their personal finances available. But who actually pays?

The 2008 leveraged buyout of the casino company, formerly known as Harrah’s, is loosely described as a takeover of the company by PE firms Apollo and TPG. To be exact, however, it was funds of these companies — Apollo Investment Fund VI and TPG Partners V — that provided the equity and acquired the casino company. As is typical of PE funds, virtually all of the equity in these two funds came from the funds’ limited partner investors. Also, as is typical of PE funds, public employee pension funds are prominent limited partners in these two funds. A review of PitchBook Data finds that 33 public employee pension funds are limited partners in Apollo Investment Fund VI, and 31 are limited partners in TPG Partners V. Of these, 18 are limited partners in both funds. When the parent company of Caesars Entertainment went public, these funds retained a 14 percent share of the company’s stock. This will now be given to the company’s creditors in the bankruptcy settlement.

Limited partner investors in these two PE funds include state public employee retirement systems (AL, CA, CO, FL, ID, IN, IA, MD, NV, NJ, NY, NC, OH, OR, MO, RI, WA, WI); state teachers retirement systems (CA, IL, LA, MO, NY, PA, TX ); city/county/municipal employee retirement systems, including fire and police (CO fire and police, Fort Worth city, IL municipal, LA city, LA fire and police, LA county, NYC city, NYC police, NYC fire, NYC teachers, San Antonio fire and police, and San Francisco city).

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