US politicians at war over LBOs
By Paul Mackintosh - 21/05/12
Anti-private equity populism rarely seems out of the news these days. The industry has Mitt Romney to thank for that – putting Bain Capital in the sights of both Republican rivals in the primaries and the incumbent Democrats. But the “Obama for America” campaign now brings you www.romneyeconomics.com, a negative campaign site eviscerating Mr. Romney’s investment record at Bain, full of soundbites about vampires from alleged casualties of Bain buyouts gone bad.
The Wall Street Journal and other conservative forums gleefully pounced on the dichotomy of launching this almost concurrently with Barack Obama’s attendance at a fundraiser thrown by Tony James of the Blackstone Group, even while his campaign criticised other Blackstone partners for supporting Mr. Romney. “The president believes that there is absolutely a place for a vibrant and successful financial sector that includes private equity,” said White House Press Secretary Jay Carney, when quizzed about this apparent hypocrisy. “The point is; what vision would you bring to the job?”
However schizophrenic the Democratic camp appears to be – and Mr. Obama would hardly be the first politician to try to have his cake and eat it – there is no question that some of the mud will stick. Unfortunately for the industry, with reason. The site spells out simply the mechanics of a leveraged buyout (LBO) in layman’s terms that even industry professionals would find hard to refute. The inferences and conclusions drawn from them may be arguable, but the basics are not.
Of course, no matter how “Obama for America” may try to cloud the issue, no one is alleging that buyouts exist solely to loot their targets. But no matter how potentially beneficial private ownership may be for an investee company, which is not what LBOs exist for. They exist simply because they can be done, and can make a fat profit for the buyers and the banks into the bargain. It’s a simple fact of economic life. There is a reason why buyout pros hire Bain (the consultant, not the GP (general partner)), rather than the other way around. Benefits to the target are incidental when returns can just as easily be extracted by dividend payouts or further borrowing against the company.
“The primary goal of private equity is to create wealth for your investors,” says Marc B Walpow, former managing partner at Bain, in the ads for President Obama. And naturally, the “Romney economics” propaganda omits to mention that the investors are often working people’s pension funds. But from a purely practical point of view, those LPs (limited partners) ought to be asking how much of buyout returns ever came from value enhancement, and how much simply from leverage. And LPs themselves shelter behind the non-recourse nature of LBO debt, which limits their exposure if an asset goes bad. Pension funds supposedly defending workers’ rights and entitlements can simply use their influence as LPs if they want to truly and effectively influence the principles of the asset class they invest in.