Bain Wrestles Romney’s Shadow as $6 Billion Effort Kicks
For Bain Capital Partners LLC, Mitt Romney may not be in the room anymore when the firm pitches the $6 billion fund it began raising last week. His shadow sure is.
While his name is absent in materials sent to potential investors for the Boston-based firm’s latest private-equity fund, his presidential candidacy has made Bain the most- discussed company in an historically secretive industry. Bain declined to comment on the details of the fund, its 11th flagship pool.
Going out now -- when President Barack Obama and supporters are spending millions decrying Romney as an outsourcer and a “corporate raider” in speeches and ads -- means Bain may face some tough Romney questions in the closed-door meetings where executives seek to raise this kind of cash. That’s especially true because some of private equity’s biggest backers are public pensions, whose boards have political ties and sensitivities, yet need the returns Bain is promising at a time when they have big funding gaps.
“There may be some political pushback in some places and they either won’t commit or wait until after the election,” said Steven Kaplan, a professor at the University of Chicago Booth School of Business. “For corporations, sovereign-wealth funds and endowments, all of that is less of an issue.”
Bain’s existing investors include Yale University, the government of Singapore and public pensions from Pennsylvania to California. Bain, in part emboldened by the success of a just- raised $2.3 billion fund focused on Asia investments, is counting on its ability to override any doubts spurred by the avalanche of news stories with a focus on its investing record.
The 100-plus page fund memorandum, a copy of which was obtained by Bloomberg News, doesn’t mention Romney by name. The materials lay out the parameters of the fund: a $6 billion pool, plus the potential for investors to commit additional money to certain deals; a promise by Bain employees to contribute at least 10 percent of the fund; and in-depth descriptions of its strategy and personnel.
Investors accustomed to private equity are likely to dismiss much of the rhetoric and back Bain, said Paul Schaye, managing partner of New York-based Chestnut Hill Partners LLC, which helps private-equity firms find acquisitions.
“They just have to give reasonable answers to the political questions when they come up,” Schaye said. “Their job is to give those investors returns. They’re not in the business of just creating jobs. The political stuff is noise.”
Bain said it has addressed their founder’s candidacy with its backers. “We’ve been communicating with our investor base and prospects, talking to those who ask about how a lot of this is political hyperbole,” said Mike Goss, a managing director at Bain. He declined to comment about the details of the new fund.
Bain may be less vulnerable to political winds given the makeup of its investor base, which has proportionally fewer public pensions versus its competitors. While more than 40 percent of the known capital committed to KKR & Co. during the past decade came from public pensions, about 6 percent of Bain’s money came from those sources, according to data compiled by researcher Preqin Ltd.
Yet prominent pensions have backed Bain in the past 10 years, and some operate in campaign battleground states. The State Teachers Retirement System of Ohio has committed more than $800 million to private-equity and venture funds managed by Bain, according to information provided by the pension. Pennsylvania’s public employees have backed Bain to the tune of more than $300 million, according to data posted on that pension’s website.
Representatives of each pension said they haven’t set times yet to meet with Bain officials about the new fund.
Risk Vs. KKR
Any disadvantage, however minor, may be magnified in a competitive fundraising environment. Bain is gathering its new fund at the same time as brand-name managers KKR & Co. and Carlyle Group LP (CG) are marketing their own flagship funds. A record 1,858 private-equity funds were seeking money as of April, according to data compiled by London-based Preqin.
Private-equity funds already are taking longer to raise, averaging 16 months last year, versus 11 months in 2007, according to researcher PitchBook Data Inc.
Pensions are looking to private equity to help deal with funding gaps. Many pensions need annual returns of about 7.5 percent to meet obligations to their retirees. Public pensions have unfunded liabilities of about $3.6 trillion, according to a 2010 study by Joshua Rauh of Northwestern University in Evanston, Illinois, and Robert Novy-Marx of the University of Rochester in Rochester, New York.
The flagship fund, Bain Capital Fund XI, will be raised in a different environment from its predecessors. In the wake of the financial crisis that saw stocks plummet and dragged the values of pensions and endowments down, private equity’s biggest backers joined together in an unprecedented way to demand lower fees and more transparency from buyout managers.
“A lot of these issues have nothing to do with Romney,” Goss said. “The trend of shifting power to the limited partners, that’s a constant theme with every private equity firm.”
Firms are raising smaller funds. Bain’s 10th fund was about $10 billion. Blackstone Group LP (BX), based in New York, last year raised about $16 billion for its latest buyout fund, less than its record-setting $21.7 billion previous pool in 2007.
The rich economics of private equity are tied to high returns. Funds draw commitments from their so-called limited partners such as pensions and endowments for about 10 years. The manager uses the money to buy companies and sell them down the line for a profit, the majority of which goes back to the limited partners, and a portion of which is kept by the manager.
Bain’s results historically have made for loyal backers. Its first fund in 1984 gave clients back almost five times their original investment, and an average annual return of more than 60 percent. While subsequent returns haven’t reached those marks, Bain told investors its 181 realized and/or public investments increased in value by three times. Factoring in unrealized gains, Bain has, in effect, doubled investors’ money on its 206 investments, according to the fund prospectus.
Bain, co-founded by Romney in the mid-1980s, hasn’t been immune to the post-crisis pressures. The firm has commanded some of the highest fees in the industry, charging investors a larger percentage of profits to participate in its funds.
While most funds charge 20 percent of profits as their so- called carried interest, Bain asked for, and got, 30 percent. That was in addition to an annual management fee of about 1.5 percent. Bain was able to command those fees in part because of the makeup of its client base. Private institutions not subject to public scrutiny were more willing to pay higher fees for the returns Bain delivered, according to Bain investors who asked not to be named.
For the new fund, investors have three options: pay a 1.5 percent annual fee, 20 percent carry and have a preferred return of 7 percent (an agreement that Bain won’t take its share of the profits until limited partners get at least 7 percent); a 1 percent management fee, 30 percent carry and 7 percent preferred return; or a 0.5 percent management fee, 30 percent carry and no preferred return, according to the prospectus.
Bain has chosen to stay mostly silent during the presidential campaign, amid a series of ads by the Obama side, and earlier from Republican primary rivals, that highlight job losses at companies such as Dade International, American Pad & Paper LLC and KB Toys Inc. The firm has occasionally issued public statements in response to certain claims.
Privately, Bain officials are arming their investors with data, detailed in a March letter to their backers and trotted out in subsequent conversations and correspondence. The firm is touting its record of increasing revenue at companies it owns by an aggregate of $105 billion during its ownership, with $80 billion coming in the U.S.
Addressing the central campaign theme of employment gains and losses, Bain argues that “calculating net job growth across a portfolio of companies is difficult to do with precision,” according to the letter, pointing back to sales increases as evidence that it’s created hundreds of thousands of jobs. “There should be no doubt that $105 billion of revenue growth is an economic engine with widespread benefits.”
Romney said Bain created in excess of 100,000 jobs during his tenure at the firm. The campaign has declined repeated requests to provide more detail. His tenure at the firm, and the timing of his departure, became a central theme in the campaign last week, as documents revealed he was still referenced in government filings as holding senior positions at Bain after 1999, when he said he left the firm to manage the Salt Lake City Olympics.
“Mitt Romney left Bain Capital in February 1999 to run the Olympics and has had absolutely no involvement with the management or investment activities of the firm or with any of its portfolio companies since the day of his departure,” Bain said last week in a statement.
The decision on whether to pony up will come down to numbers unrelated to the election, Chicago’s Kaplan said.
“If the returns have been good, it creates a lot of goodwill,” he said.
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