Ken Langone’s lecture on private equity falls flat.
Home Depot co-founder Ken Langone guest-hosted CNBC’s Squawk Box yesterday morning, and concluded with a “very political” message about how the economy really needs Mitt Romney to replace Barack Obama in the White House.
He then went on to argue that Romney is getting a bad rap for his private equity background, given where the underlying capital for private equity really comes from:
“We were talking about Mitt Romney and Bain. Bear in mind where most of the money comes for these private equity deals… It comes from the state funds… And there’s nothing wrong with that, it’s a great investment vehicle. But when you start talking about how they succeed, they succeed by rationalizing and managing businesses better… This article in the Times last week about how he made all this money, 80% of that money went to the State of Washington, the State of Oregon. Who did it go to? To the pension fund.”
I think I understand where Langone was coming from here, but he’s simply wrong on the facts.
First, let’s stipulate that the typical private equity fund distributes the majority of investment profits back to its underlying investors (which often include state pension systems). That means that Romney and his partners at Bain Capital only received a fraction of the winnings from their successful deals. And Langone probably asserted the 80% figure because 80/20 is considered private equity’s standard profit-sharing structure (the 20% is known as “carried interest”).
But now let’s get into the specifics that undermine Langone’s argument:
- 1. Romney’s former firm, Bain Capital, does not usually employ the 80/20 split. Instead, it goes 70/30 — one of the most firm-friendly structures within the entire PE industry. This is beginning to change on select funds, but not on any that are currently active.
- 2. Most of the money for private equity deals does not come from state funds, as Langone asserts. It is just one of many sources, which also include private foundations, university endowments, corporate pension funds, sovereign wealth funds and rich individuals. Industry research firm Preqin estimates that the percentage of global private equity contributed by U.S. public pension funds is just 19%.
- 3. Bain Capital, in particular, is noted for receiving an unusually high percentage of its fund capital from endowments and foundations and an unusually low percentage of its fund capital from state pension funds. Moreover, Bain does not count either the State of Oregon or the State of Washington among its limited partners (according to reports from Oregon and Washington).
Private equity is going to need effective defenders as the presidential campaign progresses, particularly if Romney becomes the nominee. But if Langone wants to be one of them, he should get a better grip on what’s he’s talking about.
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