The Aftermath for Private Equity

November 7, 2012

While Governor Romney certainly had the edge in terms of support from Wall Street, President Obama won an impressive victory.  Obviously, this is a disappointment for Mitt Romney’s supporters but for those in the private equity industry this loss arguably hurts no matter which candidate you supported.

In a particularly partisan campaign that focused intensely on Mr. Romney’s business background at Bain Capital, it’s hard to say that the country emerges with a better understanding of private equity and the industry’s role in the economy.  More likely, voters all across the nation now associate private equity with laid off workers, low capital gains taxes, off shoring jobs and other less than stellar caricatures of a complex and diverse industry.

As the Monday morning quarterbacks start to criticize the Romney campaign, one area that will likely be targeted is the weak defense of Mitt Romney’s work at Bain Capital.  The Obama campaign and especially the associated super PAC, Priorities USA, hammered Mr. Romney’s record at Bain Capital with effective, sometimes misleading television ads that showed private equity in a completely opposite light to the one the Romney campaign and the Private Equity Growth Capital Council countered with subsequently.   Far from the Bain Capital success stories of seeding Staples, Inc. (SPLS) and investing in Sports Authority, the Democratic ads hit Bain Capital and Mr. Romney for profiting from businesses that ultimately went bankrupt, for closing a manufacturing plant and other examples that portrayed private equity and its investors as representing the worst of capitalism: all the ugly side effects of a changing economy (manufacturing layoffs, tough cost cutting measures and a by-any-means-necessary approach to staying competitive in a global economy) while the profits from these investments were often shared among a small group of investors, even as the companies that were invested in closed down.  (It’s important to note that there were bright spots for the industry during which Democratic surrogates like Mayor Cory Booker and President Bill Clinton stepped back from the campaign attacks against Bain Capital and defended private equity, but these moments were few and far between in a heated election year.)

In many ways, this election centered on two extreme depictions of Mitt Romney and his career in private equity and, as is usually the case, the truth lies somewhere in the middle.  Private equity is a diverse industry that includes mid-market private equity firms to larger buyout firms like KKR & Co. and Bain Capital.  These investors serve a necessary and useful function in providing capital to undercapitalized or distressed businesses.   Private equity firms also often identify poorly organized companies or groups of companies like the inefficient conglomerates that were dismantled in the end of the last century, largely by private equity firms that broke apart the behemoths into more effective and profitable parts.

Of course, the goal for private equity management teams and investors has always been and will always be to produce a healthy return on the investments.  In some cases, this is done simply by buying an undervalued company, taking it private, making some small changes and selling at a time where the markets are more receptive to the offering.  Other times, the changes made by private equity management are substantial and even harsh like when a buyout team fires a large number of the portfolio company’s existing management, replacing them with outside executives, or by closing down various offices, trimming the workforce or slashing benefits.

Not every private equity investment is a winner and there is substantial risk to private equity investors that they will suffer losses, but as we’ve seen over the last few decades, for those firms that build a strong track record, the fees and returns can be staggeringly high.    It’s a shame that, after more than a year of debate on the merits of private equity, the electorate still doesn’t have a firm grasp of how private equity works.  What is most likely is that voters have emerged with one of two views on private equity: either the job-killing, profit-first stereotype offered by the Obama campaign, or the flawless, venture capital image that Mr. Romney’s supporters pushed.

Those who work in private equity are sharing a collective sigh of relief that the constant negative focus has likely passed their industry.  Now, perhaps, private equity firms can go back to doing what they do best: investing in businesses both big and small, financing innovation, strengthening weak and failing companies, eliminating inefficiencies and producing strong returns to general and limited partners.

 

tags: private equity, mitt romney, private equity investors, private equity bain capital, election bain capital, mitt romney election buyout, private equity buyout firms, bain capital 2012, private equity industry

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