US primaries put heat on private equity

Mitt Romney's rivals for the Republican nomination for the US presidential race are ramping up attacks on his past, causing some LPs and GPs to worry about industry-wide ramifications.

Negative stereotypes associated with private equity have become a prominent part of the US presidential race as Mitt Romney comes under fire from other Republican candidates hoping to win the nomination and challenge Democratic US President Barack Obama in November. 

This week, a group supporting candidate Newt Gingrich, who has been critical of Romney’s private equity past, posted a short clip from an online video denouncing Romney’s work as head of Bain Capital. Romney headed Bain from its founding in 1984 to 1999.

The video, called “When Mitt Romney Came to Town”, features interviews with 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,” the video said. Romney’s mission was to “reap massive rewards for himself and his investors”.

The video claims Romney “took foreign seed money from Latin America and began a pattern of exploiting dozens of

Mitt Romney

American businesses”. 

One woman featured in the video clip said she had to leave her home because of Romney. “It hurts so bad to have to leave my home because of one man that’s got 15 homes,” she said. It's not clear when the full video will be published.

According to Bain: “We have not seen the video and were not contacted about its content, but the portions that are available are an untrue and unfair attack on the Bain Capital employees who work hard with our companies every day to improve businesses. For 28 years, Bain Capital has had an extraordinary record of integrity and of growing great companies, and the attempt to distort our record for the sake of attack politics involving our former partner, who left Bain Capital 13 years ago, is unfortunate.

“We are extremely proud of the work our employees have done throughout our history, both in their work with our companies and in their contributions to the communities in which they live,” the firm said in an emailed statement.

Inviting criticism

Earlier this month, Romney, by a slim margin, won the support of a majority of delegates in Iowa, the first of the US' primary elections, which will determine who will compete in the general election against Barack Obama. The next primary contest will be held Tuesday in New Hampshire, followed by South Carolina.

As Romney has emerged as the front-runner in the Republican primaries, based on polling and his narrow victory in Iowa, the other candidates have escalated their attacks, including criticising his tenure as head of Bain Capital.

Romney has blasted Gingrich and other rivals, accusing them of attacking the very free market system of which Republicans are supposedly strict defenders. “We expect attacks on free enterprise from President Obama and his allies on the left – not from so-called ‘fiscal conservatives’,” a Romney spokesperson said, according to a statement on his campaign web site. A request for comment from the Romney campaign was not returned.

We expect attacks on free enterprise from President Obama and his allies on the left — not from so-called 'fiscal conservatives'.

Romney spokesperson

Romney opened himself up to attacks based on his past career, said Rick Tyler, a senior advisor to Winning the Future, the group that posted the video. Winning the Future is a Super PAC, an independent organisation that can raise unlimited amounts of money to support candidates. The group was formed by former Gingrich aide Becky Burkett.

Romney “put himself on the line” when he claimed during a recent debate that he helped create 100,000 net new jobs during his time at Bain Capital, Tyler said.

The video is not an indictment of the private equity industry overall, Tyler said, only of Romney and Bain Capital, which “seemed to have a very predatory model, which caused people to lose jobs and pensions”, Tyler said.

While some people may find private equity – and leveraged buyouts – acceptable ways of doing business, those people “aren’t running for president”, Tyler said. “This is not an ideological argument about capitalism; we’re all believers in free markets.”

Bain Capital’s “pattern seemed to be a data driven model [Romney] and his friends developed, focused intensely on getting costs down, but they pared down costs to such a degree that the quality of the products suffered. And then they loaded the companies with debt and then charged them obscene management fees”, Tyler said.

Tyler admitted he didn't know a lot about the private equity model, but neither will the American people, nor will they understand how leveraged buyouts benefit American workers, he argued. “I don’t think the American people understand this model,” he said.

In the spotlight

“When Mitt Romney Came to Town” is an example of the spotlight that private equity will be under as long as Romney is battling for the presidency. While his Republican rivals have called Romney’s past career into question, if he wins the nomination to face Obama in the general election, private equity is likely to attract even more scrutiny. Former US Senator Ted Kennedy also attacked Romney’s private equity career in 1994 when he successfully defended his seat in Congress.

The Private Equity Growth Capital Council, an industry trade body, has released a list of facts about the industry that it says, “sets the record straight”. The industry has 2,300 firms and invested $148 billion in 1,234 US-based companies in 2010. There are 14,200 companies in the US that are backed by private equity firms, and private equity-backed companies employ 8.1 million people globally, according to the trade group.

“Our investment model is simple: we buy companies that have significant potential for growth. Over time, we invest

If Bain bought 100 companies and lost 20, [you] can write sob stories about the 20 companies they lost, but what about the other 80 they didn't lose? And of the other 80, if they hadn't bought them, how many would have failed anyway? 

Bain LP

capital, time and effort to improve their performance and increase their value. Eventually, we sell the improved companies, hopefully at a profit, and undertake new investment,” the PEGCC said.

Private equity is a “steady source of income” for investors like public and private pensions, university endowments and charitable foundations, the group said.

The LP view

While PEGCC is making the case for private equity, it may be prudent for individual firms to publicly tout their successes, because as the scrutiny gets broader, more than just Bain Capital and Mitt Romney will be in the spotlight – the whole industry will be examined.

It’s important to get out ahead of the criticism before politicians start coming up with ideas to regulate the industry unnecessarily, according to sources. Look no further than Europe, where regulators have debated various complex rules for the industry, including recently considering forcing pensions to set aside emergency capital for private equity assets, which could prove to be major obstacle on an already rocky fundraising trail this year.

“Unfortunately, I don’t know how much truth is going to get out. It’s partisan and meant to attack instead of inform,” said one Bain limited partner about attacks on Romney's Bain career. Adding to the problem is that the mainstream media “doesn’t get the private equity business, so there will be misinformation [distributed] purposely by the suppliers of that information”.

Bain, however, has done a good job for its investors, the LP said. “They’re probably one of the best in terms of total returns out there.” The firm recorded losses because it focused on buying struggling companies and turning them around, and that’s not always going to work, the LP said.

The fact is, private equity continues to outperform relative to every other asset class.

public pension LP

“When it did work, it worked spectacularly,” the LP said. “If Bain bought 100 companies and lost 20, [you] can write sob stories about the 20 companies they lost, but what about the other 80 they didn’t lose? And of the other 80, if they hadn’t bought them, how many would have failed anyway?

“If you’re coming in and cutting costs because of a bloated cost structure, you might lose 15 or 40 percent of the work force, but you didn’t lose 100 percent of the workforce,” the LP said.

A public pension LP with no affiliation to Bain said the industry will get beaten down as long as Romney is in the forefront of the campaign. However, the negativity will not affect the LP’s commitment to the asset class, because overall performance is too strong.

“The fact is, private equity continues to outperform relative to every other asset class,” the LP said. The headline-grabbing negativity “stems from largely uneducated opinions”, the LP said. “It’s easy to throw this stuff around, and people don’t understand what they’re talking about. They read in the newspapers that alternatives [are] bad and they believe it.”