Private equity trembles over 'vulture' label as Romney rises

The titans of private equity have long feared this moment. As Mitt Romney has established himself as the front-runner for the Republican nomination, not only has his record at Bain Capital come under intense scrutiny and withering attacks — but so has the private equity industry.

Mr. Romney’s opponents are the loudest, accusing such firms of carving up companies and cutting jobs. Newt Gingrich said over the weekend that Bain looted companies and fired employees, and Rick Perry on Tuesday called private equity firms “vultures.” An anti-Romney documentary calls him a “predatory corporate raider.”

The attacks have unnerved many buyout executives — especially those who have long used their fortunes to support the Republican Party. As Mr. Romney’s rivals have sought to turn the primaries into a referendum on his business career, the private equity industry finds itself under fire from those it thought were friends.

And if Mr. Romney faces a well-financed Obama re-election campaign, the industry’s top officials know that the president will continue to push the portrayal of Mr. Romney as a fat-cat job-destroying deal maker.

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“We were bracing ourselves for this, but we’re not even in the general election yet,” said a senior private equity executive who spoke on the condition of anonymity. “Expect more pain.”

Just as Mr. Romney and his advisers are defending his work at Bain, the industry is also trying to blunt some of the attacks. For a group of Wall Street executives who prefer to operate out of the spotlight, the repercussions could be considerable. Among the things the industry wants to preserve is favorable tax treatment for profits on private equity deals.

“There is a lot of misinformation being spread, purely for political purposes and on both sides of the aisle, as it pertains to private equity,” Steve Judge, interim president and chief executive of the industry’s lobbying group, the Private Equity Growth Capital Council, said on Monday as the attacks mounted in New Hampshire.

The council will roll out an image campaign soon, according to two people with direct knowledge of the plans who requested anonymity because they were not authorized to discuss them publicly.

Economists differ on the effectiveness and impact of private equity firms, which often borrow large amounts of debt to buy companies before selling them, hopefully for a profit. Despite the critics and the defenses mounted by the industry, the research is a little less than clear, partly because much of what these companies do is private and not subject to full disclosure.

A working paper released in September shows that private equity-owned companies shed slightly more jobs than similar companies, though the difference was quite small. In total, they shed about 1 percent more jobs.

The study — by Steven J. Davis of the University of Chicago; John C. Haltiwanger of the University of Maryland; Josh Lerner of Harvard, and Ron S. Jarmin and Javier Miranda of the Census Bureau — looked at about 3,200 buyouts conducted between 1980 and 2005.

It found that companies bought by private equity firms let go a larger proportion of workers than similar firms, shrinking their work forces about 6 percent more over a five-year window. But companies bought by private equity firms also tend to open more new branches, offices and factories and hire more new staff members, partly offsetting the job losses.

Good economic sense
Some economists also argue that private equity takeovers make good economic sense in the long term, even if they result in more layoffs in the short term, by making companies more efficient.

“Private equity firms have an impact on productivity,” said R. Glenn Hubbard, the dean of the Columbia Business School and one of Mr. Romney’s economic advisers. “That doesn’t mean that people don’t lose their jobs. But the question of whether private equity adds value? It’s settled among economists.”

This is not the first time that the industry has come under fire. In 2007, the world’s largest firms, including Bain Capital, formed the private equity trade group at the peak of the buyout boom. That year, the industry became a symbol of corporate greed and excess, in part a result of the lucrative initial public offering of the Blackstone Group and a lavish 60th birthday party thrown by its chief executive, Stephen A. Schwarzman.

Congress also homed in on what it saw as tax advantages enjoyed by Mr. Schwarzman and his private equity peers.

The trade group, originally called the Private Equity Council, fought back and has continued to lobby aggressively against raising their taxes. It has so far succeeded in holding off any tax increase on private equity executives, though Congress is expected to again raise the issue this year.

Once a group of the 11 largest buyout shops, it expanded its membership ranks in 2010 and changed its name to the Private Equity Growth Capital Council. The council’s rebranding, and recruitment of smaller firms, was an attempt to promote the industry as doing more than leveraged buyouts.

Its planned image campaign will include online advertising to promote the industry as one that creates jobs and grows companies, highlighting success stories with videos of workers and executives praising private equity.

Last year, Mr. Romney’s former firm, Bain Capital, dropped out of the council. Bain’s partners decided to leave because of dissatisfaction with the group’s direction and the belief that its annual dues of nearly $1 million a year could be better spent elsewhere, according to a person with direct knowledge of the firm’s thinking.

Mr. Romney’s candidacy, combined with Bain’s withdrawal, has complicated the council’s efforts, said two people with direct knowledge of its work. Most of recent criticism of the industry has been focused on Bain, but the council has resisted directly refuting those attacks. It wants to remain nonpartisan and not appear in any way to be supporting Mr. Romney’s candidacy.

Some of the country’s top private executives — Hamilton E. James of Blackstone and David Bonderman of TPG Capital among them — are Democratic donors.

The “private equity is evil” narrative first emerged during the 1980s, when buyout executives began using large amounts of debt to buy companies. They were branded as “barbarians at the gate” — the title of a book about the takeover of RJR Nabisco by Kohlberg Kravis Roberts.

In 1994, Mr. Romney learned first-hand the power of a negative attack on private equity. That year, he started his political career in Massachusetts by challenging Senator Edward M. Kennedy. He promoted his record of job creation and building businesses at Bain.

Mr. Kennedy turned the tables on Mr. Romney by focusing on American Pad and Paper, or Ampad, a company that under Bain’s ownership, shed jobs and cut wages. The Kennedy campaign played television ads featuring laid-off Ampad employees.

Mr. Romney later acknowledged that he was unprepared for the private equity assault.

“He characterized me as a cold-hearted, unfeeling robber baron,” Mr. Romney said at the time, in an interview with The Boston Globe.

This story appeared in the New York Times on Jan. 11 as "As Romney Advances, Private Equity Becomes Part of the Debate."