Guy Hands’ View

14 November 2012

US election is a wake-up call to proclaim the benefits of private equity

It was not, of course, Mitt Romney’s association with private equity which sank his bid for the US Presidency. The seed of his failure was his inability to make voters believe he shared their concerns and ambitions. In the crucial test of whom they felt most comfortable managing the US economy, US citizens decided they wanted to stick with President Obama.

But it is also clear Romney was not the only loser from the bruising Presidential race. The public reputation of private equity, because of the Republican candidate’s past, has also taken a terrible hammering.

I’m not here to defend Romney or Bain Capital, the firm he founded and ran for 15 years.  I don’t need to. His and his company’s record stands for itself. But nor would I argue that having been successful at private equity automatically makes you a good political leader.

It was also perfectly right to put this record under the campaign microscope. It was up to Romney to defend what happened under his watch and up to US voters to decide whether that made him a more or less attractive candidate. That’s the nature of political campaigning in a vibrant democracy.

What does worry me, however, is the way that private equity was used as short-hand for the worst excesses of capitalism.  And this was, by no means, restricted to the Democrats.

It was Romney’s Republican rivals for their party’s Presidential nomination which began the attacks on him – and more importantly private equity in general – as greedy short-term asset strippers and job destroyers. Millions of dollars were spent by Newt Gingrich and the other Republican contenders on negative television advertising which heavily featured Romney’s business background.

By the time the Presidential campaign began, the ground had already been well prepared for the Democrats to carry on the attacks.  The result is that the public has been fed, over the last year, a relentlessly negative picture of the role of private equity in the economy.

Does this matter? Yes it does. Such a distorted and negative view makes it easier for legislators to see the industry as a target for punitive regulation.  And what happens in the US may easily sway opinions on this side of the Atlantic too.

The good news is that Obama himself has gone out of his way to make clear that he understands the positive role that private equity plays and explain that it was Romney’s claim to be a job creator while at Bain which was the focus of his attacks. But we can’t afford to ignore these attacks and pretend that it does not matter if private equity continues to be seen in a dismal light.

I don’t doubt that there have been excesses in the past in our industry when easy credit and financial leveraging did allow extraordinary returns to be achieved without the changing of businesses for the better. But these excesses were by no means limited to private equity. Public companies and, indeed, entire countries also benefited from easy credit. But we are now in a very different world.

Claims that private equity is simply about buying cheap, sacking staff, exporting jobs, loading businesses with debt before breaking them up for sale for short-term profits are a grotesque caricature. In fact, it is publicly-listed companies who, because of quarterly reporting and share-holder pressure, are the businesses forced to think all too short-term.

In contrast, PE by raising capital which it can deploy over a ten-year period has the freedom to look far beyond the next quarter. We have the opportunity to work out where a business should be in five or seven years and devise and deliver the strategic and operational changes to achieve this goal.

It is no quick fix. At Terra Firma our average involvement with the businesses we buy is now over five years. And this focus on the long-term is not exceptional in our industry today.

Our aim is to leave businesses stronger and more secure. Far from asset stripping we enable desperately needed capital to be injected.  Since 1994, we alone have invested nearly €14bn in more than 30 companies to help them grow and create jobs. Where jobs have to go – and sometimes they do – it is to ensure the rest of the business can survive.

The US election shows the private equity industry must be more pro-active in explaining what we do.  There are thousands of healthy, growing businesses – and millions of jobs – which owe their future to the involvement of private equity and we need to get this across.

There is one other lesson from the US elections which I think is a matter of concern. Just as it was not Romney’s previous career in private equity which was the crucial blow to his hopes, neither was his great wealth. In the US – far more than in the UK and continental Europe – being rich is no bar to seeking and winning public office.

But while wealth may not be an insurmountable barrier, it seems as if a business background is going to make it more difficult in the future. We can see how every past business decision is going to be put under the microscope whether fairly or unfairly.

The result is that since the financial crisis, the forces driving a clearer separation of power between politics, business and finance have increased.  In many areas this correction of the too chummy relationship that existed leading up to 2007 is right and long overdue.  But it must not go so far as to discourage candidates with a CV that goes beyond professional politics standing for office. At this time more than ever we need political leaders who understand business and the economy.

This article appeared in the Telegraph on 12 November, 2012.

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