Will the SEC's Private Equity Probe Hurt Romney?

For the time being, the charge that Mitt Romney is a “vulture capitalist” for his work at Bain Capital has quieted down—Rick Perry, who coined the term, dropped out of the Republican primary last month, and Newt Gingrich, who did so much to amplify it, has fallen on hard times. While the negative critique of private equity is sure to resurface if Romney becomes the nominee, that race has not yet been settled.

But in the meantime, a steady accretion of events and news stories has continued to tarnish the image of private equity investors as members of an undeserving, privileged class or—worse—possible criminals.

On Monday, Joe Dear, the chief investment officer for the California Public Employees Retirement System, one of the largest private equity investors, said the favorable tax treatment given to private equity managers is “indefensible.” This week, Democratic Representative Sander Levin of Michigan introduced the Carried Interest Fairness Act of 2012, which seeks to rectify that tax treatment, although the likelihood that the Republican House leadership will act on the bill is vanishingly small.

What’s potentially bigger news is the SEC investigation into whether private equity firms are inflating valuations and otherwise running afoul of the law. As Bloomberg’s Joshua Gallu and Cristina Alesci reported on Feb. 14:

The SEC late last year sent letters to several firms asking for details on fund investments and the valuation of assets, as well as communication with clients, according to the copy of a letter obtained by Bloomberg News. Among issues regulators are examining is whether firms use inflated valuations to attract investors when marketing new funds, a person familiar with the matter said last week.

Gallu and Alesci suggest that the SEC is focusing mainly on smaller private equity firms. Per their reporting, large firms such as Blackstone Group LP and KKR & Co. have not been contacted. Bain Capital isn’t mentioned in the story but ranks among the larger firms. That’s no doubt a relief to the Romney campaign, since any hint of wrongdoing involving Bain would command plenty of attention in the Presidential campaign. But at a time when most voters are forming their initial impressions of private equity and deciding whether they’re O.K. with it, anything that intensifies the negative impression created by Romney’s opponents can’t be helpful.

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