Bain Capital’s public pension problem

January 25, 2013, 11:52 PM UTC

FORTUNE — Mitt Romney is a forgotten man for most Americans, but he’s still causing some headaches for Bain Capital.

The private equity firm Romney founded (and left more than a decade ago) is currently in the process of raising $8 billion for its eleventh flagship private equity fund, with plans to hold a first close in March. One problem however, has been that a number of public pension funds have turned a cold shoulder toward Bain, due largely to negative publicity surrounding last year’s presidential campaign.

“If you’re on investment staff at a public pension, particularly in a ‘blue’ city or state, why are you going to stick your neck out for a firm that has so much baggage attached to it,” asks a source familiar with the situation. “Investment staff aren’t elected officials or political appointees, but their bosses usually are. There are plenty of other large buyout firms raising funds right now, so you can get exposure to the space without investing in Bain.”

MORE: Private equity needs public pensions

Normally this might not matter to Bain, whose existing investor base is relatively light on public pensions (lots of college endowments, private foundations, etc.). But the firm made a conscious decision a couple years ago to butter up public pensions, correctly forecasting that the fundraising market would become increasingly challenging (particularly for larger firms, as LPs have been trending toward the middle markets). This included a significant adjustment to its fees, which historically had been among the private equity industry’s highest.

Bain executives certainly recognized that Mitt Romney’s candidacy could throw a wrench in some of its public pension plans, intentionally not scheduling a first fund close until after the election. The hope, however, was that campaign rhetoric would be forgotten once the the ballots were counted — particularly if Romney lost and no longer was in the public spotlight. In many cases, however, it appears that the Obama campaign may have left an indelible stain on Bain’s reputation. And it also didn’t help much that neither the Romney campaign did little to publicly dispute the negative narrative.

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To be clear, I’m not suggesting that Bain won’t be able to get any public pension money. Existing public pension investors like CalSTRS and MassPRIM will return (or not) based on track record and future projections. And a few newbies may ultimately sign on, particularly on later closes.

But the number of participating public pensions will almost certainly be smaller than Bain had anticipated, which means it will have a more difficult time reaching its target. Maybe Romney will reach deep into his fortune to ease the fundraising burden, as a make-good to his former partners…

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