Just when the private equity industry was in the process of polishing up its reputation and reinventing itself as a commendable and vital contributor to economic growth, it finds itself being dragged through the mud again as the target of political candidates who seek to demonize it in the hopes of bringing presidential hopeful, Mitt Romney down. Depending on the outcome of the election, the unwanted spotlight could prove to be a double-edge sword for the industry which has been challenged by financial reform and tax-hike advocates. But, some are now beginning to wonder if, under this new scrutiny, it will ever be able to shed its “bad guy” reputation as profit hungry financial engineers looking for a company to plunder. As the campaign continues to focus on jobs and 9.2 percent unemployment rate that may prove difficult as long as these kinds of exchanges continue to pop up:
Question from Jon Huntsman at the Bloomberg Presidential Debates in New Hampshire:
Source: articles.businessinsider.com
“Since some might see you because of your past employment with Bain Capital as more of a financial engineer, somebody who breaks down businesses, destroys jobs, as opposed to creating jobs and opportunity, leveraging up, spinning off, enriching shareholders… the whole discussion around this campaign is going to be job creation, how can you win that debate given your background”
Of course, Mitt Romney, an experienced and polished campaigner had a ready-made response in which he cites the successes of his tenure at Bain Capital in creating profitable companies such as Staples, Sports Authority, and Domino’s Pizza, all great examples of job creating ventures that go to support his contention that private equity firms have been essential contributors to economic growth.
The political opposition, however, will be quick to dredge up the many examples of companies that failed, or went bankrupt, or were broken-up and sold at the expense of thousands of employees. Senator Ted Kennedy had no problem painting Romney and Bain as evil doers, and you can bet that Obama will leave Kennedy in the dust on efforts to disparage the industry. It will also give Obama an opportunity to reinforce his core belief that private equity managers are getting away with murder by paying taxes at a rate lower than ordinary workers.
The fact is that Romney built the “new” model of leveraged buyouts when he turned Bain from venture capital funding to private equity funding, and it has since been emulated by the rest of the industry. He built the bulk of fortune, estimated to be around $250 million, by buying companies, providing financial advice, often leveraging them, and then, if the company wasn’t achieving results, they would be spun-off, broken up or sold. Investors made a ton of money while employees lost jobs. Romney can talk about all the successes all he wants, but you can already imagine the smear ads Obama will come up with to steer voters to the “dark side” of the business.
On the other side of the coin, should Romney be successful and win the presidency, the private equity industry might very well find the relief it seeks from the overhang of tax threats and regulatory reform. Obviously, if that happens, they will remain as prime political fodder for Democrats who want to highlight the unfairness of billionaires paying lower taxes than secretaries. It may, in fact, have a difficult time removing all of the slime thrown at it during the campaign, which is unfortunate, because the private equity industry of today is not the industry it was when Romney ran Bain Capital. Such is the heavy price of political fame.
