Even before Mitt Romney was the presumptive Republican nominee, President Barack Obama’s political advisers made it clear that their reelection effort would center on attacking Romney’s tenure as head of Bain Capital. Now we know what they had in mind. On May 14 the campaign rolled out a brutal ad depicting Romney as a rapacious figure of greed whose firm bought, and then bankrupted, GST Steel in Kansas City, Mo. Airing in several swing states, it features a laid-off steelworker calling Romney “a vampire.” A day later, another attack: Priorities USA Action, the pro-Obama super PAC legally forbidden from coordinating with the campaign, launched its own nearly identical ad painting Romney as the sinister capitalist destroyer of … GST Steel.
This ugly portrayal of Romney and private equity first took shape in the GOP primaries, when Newt Gingrich and Rick Perry labeled their rival a “vulture capitalist.” Obama will amplify this message, backed by what’s likely to be the richest campaign in U.S. history. In the next few weeks alone, the president’s team plans to spend some $25 million on ads, hoping to cement this impression of Romney before Memorial Day, when many voters tune out for the summer. “We expected that the general election would bring new attention to private equity,” says Ken Spain, vice president of public affairs and communications for the Private Equity Growth Capital Council, the industry’s Washington lobbying group. “But what is lost in the politically charged debate is the fact that the private equity industry has pumped hundreds of billions of dollars into the U.S. economy, supporting and strengthening tens of thousands of businesses in all 50 states.”
Spain is right to be concerned. Romney won’t be the only one damaged by this onslaught, because most voters won’t distinguish attacks on Romney’s private equity career from attacks on private equity generally. One byproduct of the presidential campaign is bound to be that many Americans will come away with a deeply negative impression of the industry. Despite the enormous wealth of top private equity executives, it can’t possibly match the level of spending of a presidential campaign expected to raise $1 billion.
One false impression in business circles is that Romney, the private equity manager par excellence, will come to their rescue, deploying his campaign’s resources to defend his old industry. That’s not likely to happen. “A campaign’s objective is to protect your candidate at all times and at all costs,” says Steve Schmidt, who ran John McCain’s 2008 presidential campaign. “The art of throwing allies under the bus in pursuit of political victory is a time-honored tradition in American politics, and to the extent that the private equity industry is an impediment to that goal, they’ll go undefended.”
Sure enough, the Romney campaign’s initial response to the ads hasn’t been to defend Bain, but to establish that their candidate left the company two years before GST Steel declared bankruptcy. Later, Romney’s team released an ad of its own, highlighting another, more successful Bain portfolio company, Steel Dynamics. The ad conspicuously avoids mentioning the term “private equity.” Instead, it says Romney headed a “private sector leadership team.”
That leaves the task of defending private equity to its Washington trade group. Earlier this month, the PEGCC unveiled an ad that seeks to rebut the negative portrayal of the industry by explaining in simple, rosy terms what it actually does. But only a fraction of the people exposed to Obama’s ads will see this one, because the industry lacks the resources of a presidential campaign. Spain emphasized that the group’s aim is “to educate key audiences such as those in the media and policy makers.” He wouldn’t say where the ad would air or how much money would be put behind it. To date, the Campaign Media Analysis Group, a firm that tracks political advertising, has not registered a single broadcast television ad from the PEGCC—an indication of how badly the industry is being outspent.
The cost of this demonization could be steep. According to the PEGCC, public and private pensions supply 42 percent of the capital for private equity investments. “Public pension funds don’t want questions being raised about their investment strategy,” says Heather Slavkin, senior legal and policy adviser for the office of investment at the AFL-CIO. “Hearing terrible stuff about what private equity does will force the trustees to reconsider their allocations.”
And beyond investors, private equity’s business model could soon come under scrutiny. Congress will take up tax reform as early as December, with an eye toward raising more revenue. In addition to the carried-interest deduction, two more provisions dear to the industry will be reexamined. One is the ability to shelter profits offshore. The other is the tax code’s favorable treatment of corporate debt—the very foundation of private equity. Right now, 100 percent of such debt is deductible, one reason for the industry’s huge profits. A bipartisan Senate bill would limit this deduction to 75 percent, which would raise revenue to reduce the federal deficit, but squeeze private equity profits and force firms and their investors to put more of their own resources on the line.
Getting that through Congress will become easier if Americans come to view private equity managers as a scourge of the middle class. Some of these breaks would be tough enough to defend in the best of circumstances. They could be impossible to defend under the worst.