OKey decision-makers with private equity funds, such as the one eventually selected for the Toronto casino, must be squeaky-clean and pass a gaming suitability investigation. It’s important to ascertain in advance that a key person at a private fund can be registered. Part of what gaming lawyers do is manage or repair integrity concerns associated with a person or an entity.
In 2009, private equity groups Apollo Management and TPG Capital were among the first to face an extensive registration process in the U.S. with their $27.8 billion acquisition of Harrah’s Entertainment. The registration process was accomplished using a similar VoteCo-passive investor registration structure. The Harrah's deal was the first to allow private equity firms to acquire 100 per cent of a Nevada gaming company.
Once the VoteCo-passive investor registration structure was successfully in place in Canada and Nevada, the ice was broken and private funds moved quickly to invest in the gaming industry worldwide.
Provides Needed Capital
Since the Harrah’s deal, the increased investment in, or financing by, private funds in casinos has stabilized the gaming industry and provided much-needed capital to continue operating and in some cases expand, such as B.C.-based Gateway Casinos controlled by Toronto’s Catalyst Capital Group.
Private equity investments in casinos and gaming are also on the rise in many other jurisdictions besides Canada.
In the U.K., CVC Capital Partners is said to be considering acquiring online gambling company, Betfair Group PLC. Private equity houses Candover Investments OLC, Cinven Limited and Permira own Gala Coral Group Ltd., a gaming company with over 30 casinos and bookmaking and bingo operations. Permira was an initial investor in Galaxy Casino SA, and recently sold its remaining 20-per-cent stake after making a return of 2.6 times its investment.
Last fall, Apollo Global Management, LLC and TPG Capital LP invested $500 million for the Caesars spinoff company run by Montreal native Mitch Garber, that controls its online gambling assets.
In December, an affiliate of Apollo Global Management LLC announced another gaming deal with the acquisition of American Gaming Systems, a Las Vegas maker of gaming machines, for $240 million.
Macau Casino Investment
The most exciting private equity investment in gaming is the Ontario Teachers’ Pension Plan’s second investment in Louis XIII Holdings, a Macau-based casino developer which will result in the OTPP have a seven-per-cent ownership interest. Louis XIII Holdings is building a $1 billion casino, hotel and retail complex in Macau. According to securities filings in Hong Kong for the OTPP investment, the casino will be a tribute to the excesses of the opulent lifestyle of the French King Louis XIII.
The OTPP is a fund established and administered in part by the Ontario government and, unless Macau’s gambling legal regime becomes compliant with international anti-money laundering and counter-terrorist financing laws, the OTPP investment in a Macau casino will be a matter of concern on many fronts when the casino opens.
That’s because casinos in Macau have well-known and significant financial crime risks. They operate with the help of junkets - middlemen who bring wealthy gamblers from China to Macau, lend them substantial sums of money to gamble, and collect the gambling debts when they return to China. In China, lending funds to gamble, removing funds in excess of the currency restrictions and collecting gambling debts are all illegal activities that generate proceeds of crime. Junkets also run VIP Rooms at casinos for gamblers from China, and 75 per cent of the annual $38 billion in gambling revenues from Macau’s casinos are from VIP Rooms run by junkets.
According to Macau’s Gaming Inspection and Corruption Bureau, junket operators continue to have ties to organized crime, historically the Triads.
Under the Microscope
A few months ago, a U.S. Congressional Commission found that the casino industry in Macau was “fueled by junkets” tied to widespread corruption that launder billions of dollars annually from China to Macau. In that report, government experts referred to the casino scene in Macau as a “cesspool of financial crime” that “has gone from being out of a James Bond movie to being out of The Bourne Identity.” The U.S. Senators with the Commission urged Macau to implement anti-money laundering controls and recommended that the Financial Action Task Force expedite the review of Macau ahead of other countries to force the resolution of issue of the financial crime risks on the financial system posed by Macau.
The OTPP investment in Macau is also interesting because it demonstrates that when it comes to private equity and the gaming industry, the preservation of integrity works both ways – it can involve protecting the funds’ investors from reputational and financial crime risks of entering a non-mature gaming market like Macau, as much as it can involve gaming regulators in mature gaming markets like Canada and the U.S., protecting the industry as a whole.
Christine Duhaime, BA, JD, CAMS, is a Gaming Attorney and Certified Financial Crime and Anti-Money Laundering Specialist with the law firm of Duhaime Law in Vancouver and Toronto. She can be reached at Christine@duhaimelaw.com.