Mitt Romney’s $21.6 million of income in 2010 included profits from elite funds run by Goldman Sachs Group Inc. and Golden Gate Capital Corp., illustrating how one of America’s wealthiest presidential candidates has diversified his private-equity fueled fortune.
Trusts set up for Romney and his wife held investments in Goldman Sachs US$ Liquid Reserves Fund and a Golden Gate Capital fund, as well as a Credit Suisse Group AG-backed collateralized-debt obligation, according to tax returns released yesterday by his campaign. Romney, who stepped down as head of private-equity firm Bain Capital LLC in 1999, also owns a stake in a buyout fund started by the Boston-based company in 2008.
The disclosures by the Republican candidate, who initially resisted calls to release his tax returns, underscore how wealthy individuals can derive large portions of their income from investments not open to ordinary Americans. More than 30 percent of his adjusted gross income in 2010 came from carried interest, or his cut of investment profits from Bain, according to Ben Ginsberg, national counsel for the Romney campaign. Carried interest is taxed at 15 percent, compared with the 35 percent top rate for ordinary income.
“Individual private-equity investors, like Romney, that have high annual income as well as big balance sheets have the ability to lock up their money for long periods of time,” said Jon Goldstein, co-chief executive officer in Menlo Park, California, of Constellation Wealth Advisors, which manages money for wealthy clients.
$5 Million Threshold
Goldman Sachs US$ Liquid Reserves is $26 billion fund domiciled in Dublin that invests in high-quality money-market securities, according to the New York-based firm’s website. Golden Gate is a San Francisco-based private-equity firm whose investments include California Pizza Kitchen and Eddie Bauer. The firm has $12 billion in committed capital under management, according to its website.
Individuals usually need to meet a net worth threshold of at least $5 million to qualify as an investor in these kinds of funds, Goldstein said. The net worth of the 64-year-old Romney is between $190 million and $250 million, according to an estimate from his campaign. His tax rate in 2010 was 13.9 percent, reflecting the preferential treatment of carried interest and dividends, another source of Romney’s income.
Romney’s 2010 income included $7.4 million in carried interest, Ginsberg said. Romney, who started Bain, received $5.5 million in carried interest in 2011, when he earned an estimated $20.9 million. Romney hasn’t taken a specific position during this campaign on the tax rate on carried interest, which President Barack Obama and many Democrats want to reverse.
While he retired from Bain, Romney, his family and trusts managed on their behalf continue to have stakes in funds managed by Bain. That means they have ties to some of the massive takeovers by private-equity firms in the past decade, when nine of the 10 largest leveraged buyouts occurred. Bain participated in acquisitions of companies including doughnut retailer Dunkin Brands Inc. to Toys R Us Inc., as well as hospital operator HCA Inc., which for a short time was the largest LBO on record.
The Romneys’ relationship with Bain continued through its most recent Bain Capital Fund X. Bain finished raising that $10 billion pool in 2008 and used it to buy broadcaster Clear Channel Communications Inc., cable network The Weather Channel and children’s retailer Gymboree.
Candidates vying with Romney for the Republican nomination have sought to portray his work at Bain as destructive to the economy because its tactics at times involve firing workers and shutting plants. Former candidate Rick Perry, the Texas governor, said companies like Bain are “just vultures sitting out there on the tree limb waiting for the company to get sick.”
Romney, a former Massachusetts governor, has repeatedly said Bain created more than 100,000 jobs during his tenure there, citing success stories like Staples Inc. and Sports Authority Inc.
Wealthy individuals invest in private equity and hedge funds in an effort to outperform returns available in public markets, a feature that firms frequently highlight when marketing. Bain Capital’s first six funds produced an average annual return of 81.9 percent on realized investments through 2003, before accounting for fees, according to marketing documents obtained by Bloomberg News.
Like its peers, Bain Capital’s record suffered after the buyout boom when firms raised record amounts of money. Bain X is generating a negative average annual rate of return of 0.3 percent as of June 30, according to researcher Preqin Ltd. in London. That compares with a positive return of 8.5 percent for the median buyout fund raised in the same year.
31 Bain Funds
There were 31 Bain-related funds that generated income in 2010 for Ann Romney’s blind trust or Mitt Romney’s individual retirement account, according to the candidate’s latest financial disclosure form.
Private-equity funds are structured as partnerships usually lasting 10 years or more. The funds pool money from pensions, endowments, government funds and wealthy individuals, then combine that money with debt to take over companies.
Private-equity managers seek to increase the value of the firms through a mix of cost cuts, expansion and acquisitions with the aim of selling the company or taking it public several years later. They distribute the profits to their investors, keeping the carried interest portion for themselves.