IT’S A HOT SUMMER DAY. You’re dragging. You need an afternoon lift. You pull into Dunkin’ Donuts for an iced coffee confection, its plastic cup sweating in your hands. You get home and turn on The Weather Channel to see when the heat will break. Not for a while, it turns out. So you flip open the laptop, go to the Toys “R” Us website, and order a kiddie pool for the backyard. One you can fit in, too.
Over the course of maybe an hour, you’ve just interacted with private equity three times. More specifically, with Bain Capital, the Boston-based powerhouse launched 28 years ago by a sharp, Harvard-trained business consultant named Mitt Romney. It’s the brand that owns or has a stake in a number of brands you know — Dunkies, The Weather Channel, Toys “R” Us, and plenty of others (its portfolio includes 140 companies). Chances are you have no idea about the Bain connection, and you don’t care, so long as the coffee is sweet and cold, the forecasts are on target, and the pool arrives as promised.
But if Bain isn’t a name on most shoppers’ lips, it is increasingly familiar to political consumers paying even minimal attention to this year’s presidential contest. The firm, with $65 billion in assets, has been squarely in the political limelight ever since Romney’s Republican primary rivals began knocking his private-sector background as “vulture capitalism,” uncharitably describing his nearly 15-year tenure actively running the place. Often that light has not flattered, casting the company as an emblem of a lopsided system that’s great for the wealthy (sweet returns for executives, advantageous tax rates) but less so for the unwealthy (factory closures, layoffs, bankruptcies).
Romney’s Bain career, which consisted of investing in start-up companies and later taking over existing ones, not only made him exceedingly rich, it has become, in his telling, his central qualification to be president of the United States. The argument goes something like this: I know how jobs come and go; ergo, I can fix the American economy. That may or may not be a persuasive case in November; indeed, President Obama and his reelection team are working overtime to turn Bain into political Kryptonite. But one thing is clear. All the attention on Romney’s former workplace has forced Bain and its private equity brethren into a position they have historically not much enjoyed: having to publicly promote their work, open up about how they operate, and devote considerable time to shaping the popular narrative.
In response to the scrutiny, Bain’s managing directors penned an unusual three-page letter to investors earlier this year, offering a full-throated defense of the firm’s record, a summary of its investments and performance over nearly three decades, and a reminder of its employees’ extensive charitable activity. The executives, quoting Mark Twain on fact and distortion, asserted that companies under Bain’s control had collectively grown their revenues by $105 billion, $80 billion of it in the United States. “This sharply politicized issue attracts enormous attention and lends itself to misleading anecdotes and cherry-picking of the record,” the directors wrote. “But there should be no doubt that $105 billion of revenue growth is an economic engine with widespread benefits.”
Executives at Bain have also in recent months met in small groups with some of its 900 employees, to address concerns about seeing their company in the headlines. The firm, headquartered in the John Hancock Tower, has brought on additional communications expertise, too, hiring veteran Boston strategist Will Keyser this summer to help hone its message and engage with the media. These moves underscore an acknowledgment within the firm’s highest ranks that Bain’s image is, to a degree, under threat. They are also something of a departure for a place that has long put a premium on discretion. “We’ve been very low-key,” says one Bain executive. “And we didn’t think there was anything wrong with it.” The self-assessment prompted by the campaign, this executive says, has been a “healthy process.”
Bain is willing to participate in the public debate about its brand only to a point, however. Unlike some other leading firms, which are taking more active steps to buff private equity’s image, Bain has stuck largely to a defensive posture, believing the most prudent strategy is to respond to news stories as needed, correct the record when falsehoods surface, and provide talking points to employees and management teams at companies it controls. The firm remains averse to opening up with the press in a meaningful way. (After a month of negotiations, I was given almost nothing on the record from Bain’s managing directors.) Bain executives speak of keeping their heads down, with the expectation that, in the words of one, “this, too, shall pass.” Bain’s reluctance to engage more forcefully is a source of puzzlement among others in the industry.
At Bain and at other firms, though, there is a fundamental debate about all this: Does the scrutiny of private equity really matter in the long run? Is a concerted public relations counteroffensive even necessary? According to some executives in the industry, politics is politics, and the breathless attacks won’t stick. Indeed, there is evidence that major investors in private equity — which include public pension funds and university endowments — are decidedly unconcerned with the presidential campaign’s twists and turns. At least so long as the returns remain strong.
Others believe the risks posed by negative publicity are real. Bain and firms like it, this argument goes, cannot afford to have their names sullied to the point that investors begin taking their money elsewhere. Or that deals are derailed because lenders or businesses targeted for takeover don’t want to be associated with them. Or that politically sensitive lawmakers enact tax reforms damaging to the industry. Or that the best and brightest young minds choose to work in other sectors.
It’s been said that the political success of Mitt Romney, one of the most prominent members of the Church of Jesus Christ of Latter-day Saints, has ushered in a Mormon Moment. The same might be true for private equity, which, for better or worse, still has considerable time left under the glare. How the industry emerges from it may depend on what Bain and its fellow firms do — and don’t do — in response.
SHUTTERED FACTORIES. EMPTY STOREFRONTS. Teary laid-off workers in dark rooms. A grave narrator over ominous music. Even by today’s standards of negative campaigning, the 28-minute video When Mitt Romney Came to Town, released in January by a political action committee backing Newt Gingrich for president, was a doozy. The film, which attracted copious attention before the South Carolina primary, was a blistering — and highly misleading — account of Romney’s stewardship at Bain Capital. And so it began: Bain, and by extension private equity, would be the boogeyman of the 2012 presidential campaign, much as lobbyists and the dreaded “special interests” had enjoyed that distinction in political races past.
The word “private’’ in private equity refers to the investment — companies controlled by private equity firms and their investing partners typically are not publicly traded. But it also describes a mind-set, a culture. For years, private equity firms were loath to talk about themselves or their work. They embraced opacity, quietly going about their business of buying, retooling, and selling companies at a profit, earning handsome returns for themselves and investors. Then, around 2007, things changed.
Private equity firms such as Bain, Kohlberg Kravis Roberts & Co., Cerberus Capital Management, the Blackstone Group, and the Carlyle Group made waves with some monster acquisitions, snatching up major companies in unprecedented deals, among them Chrysler, the HCA hospital chain, and real estate giant Equity Office. Some leading private equity firms themselves went public, submitting to new disclosure and regulatory requirements. Meanwhile, public pension funds — charged with securing the retirements of teachers, firefighters, and cops around the country — were boosting their private equity investments, attracted by better rates of return than they could find elsewhere.
So now you had a sizable chunk of the American workforce employed, in effect, by private equity and billions in public retirement dollars invested in its performance. Add in some conspicuous extravagance — Blackstone cofounder Stephen Schwarzman’s highly publicized 60th birthday party in Manhattan in February 2007 spared no expense — and policy makers, the nonfinancial media, and the public took notice. On Capitol Hill, lawmakers, including US Representative Barney Frank of Massachusetts, then chairman of the House Financial Services Committee, threatened to change the favorable tax rates that private equity executives paid on investment earnings.
It all amounted to a coming out party for private equity, but not everyone was celebrating. Critics used nasty words like “vultures,” “raiders” and “raping,” “pillaging.” Labor unions and their allies assailed firms for their treatment of workers at companies under their control. “The industry recognized it had a problem,” says Pam Hendrickson, chief operating officer at The Riverside Company, a private equity firm co-headquartered in Cleveland and New York that specializes in buying small companies. “People sort of said, ‘We really need to explain more what we do.’ ”
Several big firms, Bain included, banded together in 2007 to establish a trade association called the Private Equity Council, realizing they needed to be more image-conscious. (Bain also began spending heavily on Washington lobbyists.) The Private Equity Council in 2010 changed its name to the Private Equity Growth Capital Council, to emphasize the industry’s work growing companies. With new leadership in 2011, it prepared a major public relations push in anticipation of the political scrutiny of the presidential cycle. That scrutiny came all right, though months earlier than everyone expected, when Romney’s Republican rivals zeroed in on his business resume.
The intent of the publicity effort, industry officials say, is not to spray gold on an undignified practice; it’s to highlight what they genuinely believe is a constructive force in the American economy, one that builds businesses, creates wealth, and funds retirements and college scholarships. “My philosophy has always been a glasnost-oriented thing — that giving people information is a good thing, because with information comes understanding, perhaps even appreciation,” says an executive at one major private equity firm in the trade group, who, like many others I talked to, agreed to speak only anonymously.
So the council got busy. It began providing political reporters a primer on how the business operated. It has produced slick videos featuring companies that have thrived under private equity control, as part of a multimillion-dollar Private Equity at Work campaign the group launched in February. And it is connecting leaders of companies owned by private equity firms with members of Congress, to make sure lawmakers know the value of those businesses to local economies. The member firms in the trade association — there are three dozen in all — took some persuading before they accepted that the robust outreach plan was worth the time and expense, says council president and CEO Steve Judge. “They put us through our paces,” he says. Ultimately the firms came around.
But there’s one glaring exception: Bain Capital. Bain dropped out of the trade group at the end of 2010, just as the presidential race was approaching. It has not rejoined. If there were ever a time one would expect to see Bain standing shoulder to shoulder with its peers, it would be now. The firm, though, has opted to go it alone and let the industrywide PR effort carry on separately.
Given its leading role in the political theater, Bain’s absence has raised eyebrows — and prompted a little resentment — at other firms. “You scratch your head when you hear it,” says an executive at another private equity outfit in the consortium. “It reflects a lack of political sophistication and it reflects, quite frankly, a free-rider mentality.” An executive at a different firm says many in private equity are nonplused, especially because the critique of Bain had “splashed mud” on everyone else. “I thought we’re better off standing together defending the industry’s record,” this executive says. “You would think you’d want your friends around.”
Bain executives declined to address the criticism on the record. They say the decision to leave the trade group had nothing to do with the looming campaign. They say they abandoned it because Bain’s interests were different from other firms’. They also say they didn’t want to share proprietary information with competitors and that they simply felt they could be more effective communicating directly with their many stakeholders. “We feel like that’s our obligation really,” one executive tells me. “I don’t feel like we need to do more than that.” Bain executives say they’re agile enough to change course if they determine they need to do things differently. For now, another executive says, “I think we’re fine by ourselves.”
THE CURRENT POLITICAL CAMPAIGN isn’t the first time Bain has been a target, of course. Romney’s maiden political venture, a 1994 bid for the US Senate, ended in failure largely because his opponent, Ted Kennedy, hammered away relentlessly at Romney’s business record, namely the so-called Ampad deal, in which workers at an Indiana paper-products plant saw jobs, pay, and benefits slashed after a Bain-controlled company took over. Indeed, the industry has its share of messy stories — companies targeted for leveraged buyouts that collapsed after being loaded with debt by private equity firms, which still collected hefty fees partly financed by the borrowing they designed. Journalist Josh Kosman writes in his 2009 book, a critical take on the industry called The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis: “[Private equity] firms don’t specifically set out to damage the companies they buy. But because they are more interested in the short term than the long term, they often cripple them for the future by squeezing them too hard to deliver in the present.”
As others have noted, however, private equity, with both big successes and colossal failures, is a difficult industry to summarize, in part because it has evolved since its founding. Specialists say deals today, for example, aren’t nearly as debt-dependent as they used to be. A study released in 2011 by researchers from Harvard University, the University of Chicago, the University of Maryland, and the US Census Bureau looked at about 3,200 buyouts from 1980 to 2005 and found that companies owned by private equity eliminated more jobs than comparable companies, but barely. Another study, sponsored by a financial industry trade group, found that job growth at private capital-backed companies from 1995 to 2009 was far higher than that at other companies. (Bain says that, over its history, fewer than 5 percent of companies have filed for bankruptcy while under its control and that it has helped create hundreds of thousands of jobs.)
To be sure, job cuts can be a necessary, if painful, step when companies reposition themselves in a market. Private equity’s defenders say those reductions are oftentimes either coming anyway because of economic conditions or would be worse without private equity’s intervention. “The more people learn about private equity, the more they’re understanding it serves a useful purpose in the whole economy,” says David Brophy, a finance professor at the University of Michigan’s Ross School of Business and director of its Center for Venture Capital and Private Equity Finance. “They break eggs to make omelets.”
Broken eggs make good politics, though. So Barack Obama’s team quickly picked up where Gingrich left off. Google searches for the words “Bain Capital” had spiked in several important swing states as of mid-July, some news organizations noted, suggesting that voters were paying attention. A series of prominent Democrats — Newark Mayor Cory Booker and former president Bill Clinton, among them — threw cold water on the go-after-Bain strategy. But Obama and his advisers clearly believe it holds promise.
Polls paint a mixed picture. In two surveys earlier this year in which voters were asked their views on private equity, the industry didn’t fare so well. Fifty-two percent of respondents in a Bloomberg News survey in March, for example, said private equity practices were “mostly bad,” compared with 27 percent who said they were “mostly good.” A USA Today/Gallup poll released in July, however, found that voters, by more than a 2-to-1 ratio, saw Romney’s business background as an asset.
For private equity leaders, watching the debate about their work unfold in a political environment can be infuriating. Paul S. Levy helped cofound JLL Partners, a mid-size New York-based private equity firm, in 1988. An Obama voter in 2008, he’s outraged at the “noxious debate” he says the president and his allies have fueled about Bain, job losses, and outsourcing. It’s a selective and deceptive account, Levy says. What about layoffs and outsourcing, he asks, at companies with executives who support Obama? “This is just an effort to divert people from their true pain,” says Levy, who will not vote for Obama again.
But Levy remains frustrated, too, that private equity has not pushed back more aggressively. “It’s surprising to me that more people haven’t come to the defense of Bain specifically and the defense of private equity generally,” Levy says, including Romney and Bain executives themselves. “We’re not talking about a marginal operation here,” he says. “We’re talking about one of the preeminent firms, which I think has earned its reputation — meaning, positive reputation.”
‘THIS IS A COMPANY that has been around for 28 years,” one Bain executive tells me. “On November 7” — the day after the election — “it will be around, too.” The key for Bain, its leaders say, is to strike the right balance between engaging in the political debate and not getting too distracted. “What you don’t want to do is become focused on political hyperbole at the expense of the business,” says Stephen Pagliuca, a Bain managing director who has been with the firm since 1989 and was, in 2009, a Democratic candidate for US Senate. It’s important, Pagliuca adds, to differentiate between criticism and accusations that cause mere “hurt feelings” and those posing “substantial issues for Bain Capital.”
Bain executives say the firm’s role in the campaign does come up with investors, but only as a “footnote” or as “throat-clearing” at the beginning of meetings. It is “by no means the centerpiece of conversation,” one executive says. Take the California State Teachers’ Retirement System, which has some $1.25 billion invested with Bain. A spokesman for the system, Ricardo Duran, says in an e-mail that its fiduciary duty to 856,000 members and their families is paramount. “With that as a backdrop,” he says, “the scrutiny generated by a heated election year matters less than the performance the portfolio generates to the fund.” And private equity, Duran says, has been the best-performing asset class in the system’s portfolio over the past 24 years.
Indeed, even though public pension boards, many with union representation, may have political sensitivities, they’re under tremendous pressure for results in an era when many retirement accounts are underfunded. Hank Kim is executive director and counsel of the National Conference on Public Employee Retirement Systems, which counts more than 550 member systems nationwide and in Canada. He says that despite the “headline risk,” public pension managers ultimately want stability and good returns, which private equity has provided. “I will say it’s becoming more of a conversation, but I don’t know that it’s going to have any long-term impact,” Kim says. “I haven’t heard anybody say, ‘Hey, we should back off.’ ” Max Patterson, executive director of the Texas Association of Public Employee Retirement Systems, puts it more succinctly: “It’s all about money.”
Bain also appears to be doing just fine drawing fresh investment dollars in a political environment. In early July, the firm, which has 11 offices around the world, closed fund-raising on a new $2.3 billion pool it will use to invest in Asian companies, bringing in $300 million more than its original target. Still, the firm faces a new test: It’s begun soliciting for a $6 billion fund, according to Bloomberg. And with other major private equity firms out seeking investor money, too, it’s conceivable some contributors would remain with private equity but be moved to choose a firm other than Bain. Such decisions within the industry, says Peter Rose, senior managing director for global public affairs at Blackstone, “can come down to subjective judgments.”
Perhaps the biggest risk from all the negative publicity is industrywide: that Congress, as part of a tax overhaul, will in the coming years eliminate or restrict current tax advantages important to private equity. Those include a low capital gains tax rate and an allowance that certain investment income, called carried interest, can be taxed at that low rate. Critics believe that should change, because it means already-wealthy people like Mitt Romney pay lower rates than, say, teachers. “It’s a gross inequity,” says Brad Borden, a professor at Brooklyn Law School who consults to the Joint Committee on Taxation in Congress. Defenders say the low rates are important incentives to make investments that can involve considerable risk. The private equity industry (albeit without Bain’s involvement) is spending so much time cultivating the media and policy leaders because it wants to make sure its work and value to the economy are widely known when that debate happens, says Steve Judge of the trade association.
For those at Bain, their honor is also at stake. “Everybody was always very proud to work at Bain and felt we were the best in the industry,” one former Bain executive tells me. “You always want your image to match who you are,” a current executive adds. “Good things happen to good people, and we’re good people doing good things.”
I put all this to Colin Blaydon, a management professor at Dartmouth’s Tuck School of Business who runs the school’s Center for Private Equity and Entrepreneurship. Blaydon, who serves on some private equity advisory boards, believes the industry does have a good story to tell and that its image — to regulators, lawmakers, and within the finance community — matters. How that story gets told, though, remains an open question, in part because the parties involved in the debate all have different motives.
As for the political operatives, Blaydon says, “their job isn’t to explain to the rest of us what private equity is all about. Their job is to collect votes. And the arguments they’re going to make are arguments from their point of view.” Then you have the private equity industry overall, a good chunk of which would prefer to be left alone, Blaydon says. And then you have Bain, which is feeling its way, at times uncomfortably, through virgin territory. “They seem,” Blaydon says, “to just want to get on with their business.”Scott Helman is a Globe Magazine staff writer. E-mail him at firstname.lastname@example.org and follow him on Twitter @swhelman.