Bain of existence

10 January 2012 By Jeffrey Goldfarb

Private equity is caught in the crossfire. Rivals for the Republican nomination for the U.S. presidency are leading a full-blown assault on front-runner Mitt Romney’s track record at Bain Capital. The attacks won’t stop Romney, but the collateral damage could hurt the buyout industry.

Only two months ago, KKR kingpin Henry Kravis warned his fellow buyout barons to beware the barrage. If Romney becomes the nominee, “they’re going to describe us all as asset strippers,” he said. But “they” were supposed to be the Democrats. Not even Kravis anticipated friendly fire.

Romney, to an extent, invited the onslaught. To burnish his economic credentials, he put forward an unsupportable claim about job creation during his time at Bain. But that doesn’t justify the absurd spectacle that has unfolded. Newt Gingrich, who once advised private equity firm Forstmann Little, claimed that Bain “looted” companies. Jon Huntsman, whose family’s publicly listed chemical business agreed to an ultimately unsuccessful $6.5 billion leveraged buyout in 2007, jumped on the bandwagon. So did Texas governor Rick Perry, even though his state’s teachers – whose retirement fund board he appoints – have invested in Bain funds.

Moreover, the GOP en masse has helped thwart repeated efforts to make buyout firms pay a fairer tax rate on a big chunk of their profits. And while Republicans in Congress took less money related to private equity than Democrats between January 2007 and June 2011, they still pocketed some $6.5 million, according to research firm MapLight.

The rhetoric is unlikely to derail Romney’s chances of taking on President Barack Obama in November’s election. The populist anti-private equity message from GOPers could, however, have staying power. For one, it gives fresh fodder to the Occupy crowd. It also will make it harder for Republicans to defend the industry when debates such as the one over taxing carried interest are rejoined in Congress.

Private equity is battle-tested. It survived, if somewhat weakened, a crusade from British labor unions and legislators a few years ago. Buyout barons are also still licking their wounds four years after the financial crisis began. They may relish having one of their own in the White House. But their industry could get badly scarred along the way.

 

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