Criticism of private equity "ridiculous", say practitioners

Many private equity practitioners are probably cursing the day Mitt Romney decided to run for the US presidency. In a contentious primary race, rival Republican candidates have demonised Romney for his career at Bain Capital, accusing him of being a vulture capitalist, a job destroyer and, among other things, the archetypal one-percenter.

In truth, Romney is far richer than that — with a net worth of around $250 million, he is more like the 1% of the 1%. Yet his attempt to win the nomination has drawn the private equity industry into the political limelight, with critics from both sides (from John Stewart to Bill O’Reilly) decrying the 15% tax rate that most billionaire private equity stars pay on their income.

Few in the industry appreciate such scrutiny, but some Asian private equity specialists, including Bain’s James Hildebrandt, took the opportunity yesterday to defend their profession against the detractors.

Acting as the moderator of a private equity panel at the FinanceAsia Corporate Funding Asia forum, Lyndon Hsu, head of leveraged and acquisition finance in Asia-Pacific for HSBC, asked the panellists to address the criticisms: “Some of the charges are that private equity firms plunder and cut jobs, don’t pay enough taxes and that the returns on funds invested in private equity are fairly low anyway. How would you candidly counter those charges?”

Taking one for the team, Hildebrandt went first and scoffed at the idea that industry returns were low. “If you look at returns over time, they’re about 10% above public returns, net. So if you want 1,000bp, I guess that’s good alpha. For a lot of pension funds or family investors looking for higher returns, private equity is really the best place to go.”

He was also dismissive of the idea that private equity firms cut jobs. “Almost all of our investments are in growth businesses with a huge amount of job creation,” he said, claiming that the companies in Bain’s portfolio employ more than 100,000 people.

But he also admitted that private equity was hard for some people to comprehend. “It is a very complicated industry in terms of what we’re doing and how we’re doing it, so I can understand why there’s a lot of debate and misunderstanding.”

Grant Kelley, head of Asia at Apollo Global Real Estate, was less forgiving of the critics. “Castigating private equity is like castigating share ownership, it’s just a ridiculous generalisation,” he said, clearly riled by the subject. “The devil’s always in the detail.”

He made the point that most of the critical press has focused on one or two failed transactions, without recognising that such deals are collateralised against all the other deals in the same fund — win some, lose some. “Year in, year out, the only reason firms like ours stay in business is because we’ve delivered out-performance,” he said.

In Asia, claimed Hildebrandt, very few chief executives and CFOs at companies owned by private equity firms would say it had been a bad experience. “Certainly less than 10 out of 100,” he estimated.