Friday Letter Getting the facts out

Illinois' politicians have reacted to private equity-related press coverage with a decision to examine the investment risk being taken by the state's pension programmes. It's a reminder that partisan attacks on private equity are likely to lead to more than one committee meeting.

It's happening: just as many predicted, private equity has become a key talking point in the constant news flow surrounding the US presidential primaries. And it isn't being painted in the most flattering light.

Accusations of unabashed greed, job slashing and predatory practices have been levelled at Mitt Romney by his Republican rivals vying for the party’s nomination to take on Barack Obama in November’s general election. Romney’s 15 years at the helm of Bain Capital — and the tax rate on his sizeable income, much of which is in the form of carry — has been one of the main focuses of his rivals’ attacks.

A group supporting Republican candidate Newt Gingrich released a video earlier this month called “When Mitt Romney Came to town” featuring people who claim to have been victimised by Romney’s and Bain’s allegedly greedy ways. “Their greed was only matched by their willingness to do anything to make millions in profits,” according to the video.

The worry among industry insiders gathered at Private Equity International’s annual CFOs & COOs Forum in New York this week wasn't just that, once again, the American public was being presented with the unflattering stereotypes of heartless take-over firms. But that public institutions and politicians would feel compelled to react to negative, often erroneous or one-sided reports, by scrutinising the industry without pausing to fully understand how it works and who it benefits.

That already seems to have happened in Illinois, where a politician reacting to media reports on private equity requested a committee be formed to examine the investment strategy of the $38 billion teachers’ pension.

It's unclear what, if anything, will come of the committee's work, but it's safe to assume the state teachers' pension, a long-time investor in private equity that upped its allocation to 12 percent last year, will speak up with facts that underline the importance of private equity returns to meet overall objectives and pension liabilities.

More institutions will need to do the same with the heat on private equity expected to intensify as the election coverage rolls on. Taking proactive, offensive measures are the way forward, according to speakers at the conference.

“This goes back to the notion that, if we just keep our heads down and generate good performance, everything will be okay. That’s an antiquated notion,” one speaker at the conference noted. “It’s not about that anymore. I can’t imagine the Democrats are going to be softer on this issue than the Republicans have been on themselves. It’s going to get worse before it gets better.”

A number of firms are trying to help influence the way the industry is discussed and explained in the media by openly discussion their successes in growing businesses and creating jobs. The Riverside Company has testified in front of Congress in Washington, DC, and in the media about what it does to build businesses, while Blue Wolf Capital recently walked the Wall Street Journal through one of its investments to explain how it added value.

Pam Hendrickson, chief operating officer at The Riverside Company, encouraged peers to, “Be more open, share your success stories, share your mistakes … we’ve got to beat our own drum.”