PRIVATE EQUITY’S TRUMP PROBLEM
Good morning. In today’s guest column, Fortune editor Stephen Gandel examines the pitfalls of a Trump presidency for private equity execs. Follow him on Twitter here.
A few years ago, when one of their own was running for president, a number of private equity executives seemed worried that the industry might have a Mitt Romney problem.
It wasn’t all about the bad publicity that private equity got during the 2012 campaign, though many weren’t thrilled about that. The real concern: What would happen if Romney won? Every move by Romney, tax changes or regulator easing, would be scrutinized as to whether it was too friendly to his former colleagues. What would happen when the Justice Department had to approve a controversial PE-driven consolidation?
What’s more, any big deal that private equity did, particularly any done by his old firm Bain Capital, would likely be subject to more media attention then ever. The concern was that fear of a backlash might make a Romney administration generally critical of the industry and big PE deals, so that his old connections to the industry didn’t become a liability.
Of course, the private equity dodged that bullet in 2012. President Obama, as you may remember, won a second term. But the question now is whether private equity’s Trump problem is as big as its Romney problem ever would have been.
While Trump doesn’t come from private equity, though real estate investing in increasingly a big part of what private equity firms do, many of the people in his administration, or advising it, do. Wilbur Ross most recently ran a private equity firm, doing leveraged buying outs of battered companies in the steel and coal business among others, before taking the job as head of the Department of Commerce under Trump. Steve Mnuchin, Trump’s treasury secretary, technically ran a hedge fund, but his buyout of bank OneWest at the height of the financial crisis might as well be a private equity deal. Trump also named former Warbug Pincus partner Kenneth Juster as his top international economics advisor. The most notable Trump private equity executive is Steve Schwarzman, who is still the head of Blackstone, but has taken on being chairman of Trump’s recently created Strategic and Policy Forum, an advisory board made up of CEOs.
And while Steven Feinberg, head of secretive private equity firm Cerberus Capital, doesn’t officially have a job in the White House, he does appear to be traveling in Trump’s orbit. Not to mention Jay Clayton, who is not technically from the private equity industry, but also did a lot of PE deals while in his most recent job at Sullivan & Cromwell.
All those ties could lead to a PE-friendly administration, but it could also hamstring the industry, or at least some players. Blackstone owned companies might be reluctant to move manufacturing overseas, even if that would save costs, or even potentially buy a foreign company that seemed to be taking jobs away from America. Trump in the campaign talked about getting rid of the carried interest tax credit. If he doesn’t now, will that look like he is keeping the loophole to benefit his friends and cabinet members.
And Trump hasn’t been good for private equity’s big picture, at least so far. Talk of his stimulus policies has driven up the stock market, making deals more expensive at a time private equity firms have a record amount of cash to invest. And the Fed seems poised to raise interest rates again later this month, in part because of concerns that Trump’s stimulus efforts could be inflationary. And that’s not good for PE’s bread-and-butter LBO deals.
And PE firms will have to adjust to the new Trump administration at a time when they are facing their own internal problems. Out this morning is a new report on the industry from the Boston Consulting Group. While the BCG report has the rosy title of Capitalizing on the New Golden Age in Private Equity, it says the industry faces some serious growing pains as more and more investors keep throwing money at the industry as alternatives (such as hedge funds) have sucked wind.
The report zeroes in on three areas the PE industry is behind: technology, talent, and management capability. Perhaps its most pointed criticism is that none of the major private equity firms seemed to have a coherent succession strategy, or appropriate representation of women in their upper ranks. The report also says the industry still hasn’t done enough to move away from “just merely acting as a source of capital and toward true strategic partnerships.” BCG singled out Romney’s old firm Bain Capital, as well as Advent International and EQT, as being ahead of their rivals in helping portfolio firms map out a “detailed value plans.” You can read the entire report here. — Stephen Gandel
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