Private Equity Mitt Romney

Mitt Romney, Private Equity, and Carried Interest

The Republican presidential primary has taken a particularly nasty turn with countless negative ads and mudslinging in the latest debates. One attack against Governor Mitt Romney has been particularly surprising in a GOP primary: that Mr. Romney made millions through the private equity firm that he founded, Bain Capital, often by slashing benefits, cutting jobs and stripping value from the portfolio companies his firm invested in. Linked to this attack is questions over his compensation at Bain Capital which was largely through capital gains which is taxed at 15%, much lower than ordinary income.

The attacks, largely from former House Speaker Newt Gingrich, have drawn new attention to private equity and capital gains tax on carried interest (somewhat ironically, Mr. Gingrich was paid about $60,000 for a speech praising private equity–that income was probably taxed higher than 15% though). As the news media and the American public focus their attention on this industry, which has so often been the focus of derisive attacks and criticism, the Private Equity Growth Capital Council has delivered a response with a fact sheet aimed to “set the record straight” on private equity that you can read here:

PEGCC Sets the Record Straight on Private Equity

Statement from Steve Judge, Interim President and CEO of the Private Equity Growth Capital Council (PEGCC) in response to recent political attacks that mischaracterize the industry:

“There is a lot of misinformation being spread, purely for political purposes and on both sides of the aisle, as it pertains to private equity. What’s been lost is an understanding of the critical role that private equity investment plays in growing the U.S. economy and delivering more than a trillion dollars in investment returns to pension funds, endowments and charitable foundations. While the business model has evolved over time, the fact of the matter is private equity provides capital and operational expertise to companies that are often underperforming or on the brink of failure. In 2010 alone, private equity invested nearly $150 billion in U.S. companies. As a result, many businesses grow and are strengthened and often jobs are created over the long term.”

The Facts About Private Equity

Private Equity Fast Facts

There are 2,300 private equity firms in the U.S. In 2010, private equity firms invested more than $148 billion in 1,234 U.S. based companies in 2010.
There are 14,200 companies in the United States that are backed by private equity investment.
Private equity-backed companies employ approximately 8.1 million people worldwide.

Private Equity: An Overview

What is Private Equity? Private equity is a vital source of capital investment in the U.S. and global economies. Our investment model is simple: We buy companies that have significant potential for growth. Over time, we invest capital, time and effort to improve their performance and increase their value. Eventually, we sell the improved companies, hopefully at a profit, and undertake a new investment.

How Does Private Equity Work? Private equity firms seek out underperforming or undervalued companies. By working with these companies managers unlock significant value —by changing the business strategy, injecting new managerial expertise, or improving sales and marketing, production, distribution or sourcing. Ultimately, private equity firms succeed when their investments are able to achieve long-term success.

Who Benefits? Private equity investment is a steady source of income for its investors such as public and private pension funds, university endowments and charitable foundations. Public and private pension funds make up 42 percent of all private equity investment. Private equity also provides enormous benefits to the company, its employees and investors, and the U.S. economy. According to the most recent research, through 2009 private equity funds worldwide have distributed more than $1.6 trillion to limited partner investors.

The Benefits of Private Equity

Private equity drives growth. The mission of a private equity firm is to strengthen the businesses in which they invest. A study by Ernst & Young found that the average value of businesses in the U.S. acquired by PE firms grew 83 percent over the course of private equity ownership.

Private equity creates value. Private equity firms seek out companies in which they believe they can unlock significant value by changing the business strategy, investing new capital or injecting new managerial talent.

Private equity makes companies and the American economy more competitive.The PE investment model is built on the premise that companies can improve their performance and better position themselves for long-term success by aligning the interests of owners and managers and removing the short-term pressures of public ownership.

It’s clear that if Mr. Romney wins the primary he will be forced to endure much more sustained criticism over his role at Bain Capital, his taxes, and how the companies he invested in ultimately performed. You can bet that President Obama’s team is cooking up ads similar to the ones that Senator Ted Kennedy used to defeat Governor Romney in his 1994 senatorial campaign. It will be interesting to see whether Mr. Romney can mount a stronger defense of private equity as the spotlight once again turns to the world of buyouts.

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