No one is crying for private equity bankers and, before now, that was just fine with them. As long as profits promised to keep rolling in they were willing to bear the political attacks on Mitt Romney and Bain Capital that have vilified their industry. But things have changed, and now the dealmakers are mounting a defense.
It’s not like the bankers haven’t done a decent job of disparaging their line of work all by themselves. When the German politician, Franz Müntefering, six years ago called private equity investors a greedy “swarm of locusts,” buyout king Stephen A. Schwarzman at Blackstone Group responded by throwing himself a $3 million birthday party. Leon Black at Apollo Management may have outdone Schwarzman, throwing himself a birthday party with Elton John performing for $1 million.
The industry has long had a tin ear. So it may have seemed like no big deal when Republican presidential hopefuls began slurring Romney as a “looter” and a “vulture” who became rich at the expense of ordinary Americans who lost their job after Bain acquired their company. But now, some say, enough is enough.
The Private Equity Growth Capital Council, a lobby group, is readying an image campaign that will point up private equity successes—and yes, there are plenty of them. Studies show that private equity firms tend to fire more employees from their portfolio companies than the owners or managers of comparable companies but that the companies run by private equity firms also tend to rebound and resume hiring quicker.
Another point the industry might want to make: it’s a way different game today than when Romney was playing in the 1980s and 1990s. Then, there were maybe a dozen firms and tens of billions of dollars looking for deals. With little competition, these early players could easily buy cheap with borrowed money and cost-cut their way to quick profits. But today there are thousands of private equity funds and something close to $3 trillion chasing deals. Competition is fierce. According to the Boston Consulting Group’s 2012 private equity report:
“The days when private-equity firms could create value primarily through leverage are long over. … In the future, private equity’s ability to generate operational value will depend less on bottom-line improvements and more on a firm’s ability to develop and grow the business and improve the top line of its portfolio companies.”
Translation: cost cutting to improve profits without growing a business is yesterday’s game. The report estimates that, going forward, for private equity firms to succeed they will have to grow portfolio companies’ sales by 11% a year. That’s more likely to create jobs than stir job cuts.
As one private equity executive told me this week: “We’re not good; we’re not bad. We’re just a pile of money seeking a return. Sellers have options. When they choose us it’s because they see us as their best choice. There is no set playbook for what we’ll do with a company. Sometimes we cut costs. Sometimes we sell assets. Sometimes we invest for growth. It’s a puzzle. This business is about problem solving which, by the way, is a great skill for any president.”
So why is the private equity industry preparing an image campaign now? Simple. The raider rhetoric, which will only get louder in coming weeks and resurface again if Romney wins the nomination, is starting to cost them money. One executive told me that it has become more difficult to raise funds from public pension systems where managers fear being accused of dealing with job-slashing profiteers.
The heightened rhetoric also raises the specter of taxing private equity profits as ordinary income rather than more favorable capital gains. This is a long-simmering debate that, if it goes against the private equity industry, would be a monster hit to compensation—though probably not so much that it would keep someone like Leon Black from hiring Elton John to sing a few numbers at his private party.