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Private Equity and Politics: Is it Hurting Your Deal Flow?

After Mitt Romney ran for president last year, private equity firms sustained some harsh criticisms. For the average reader, private equity became defined by deal clubbing scandals, carried interest tax finagling, and accusations of job destruction. General disapproval and government scrutiny soon followed.

Despite the fallout from Romney’s efforts, ex-PE professionals seem as determined as ever to enter the political world. Currently, Gabriel Gomez of Massachusetts, Bruce Rauner of Illinois, and Scott Honour and Mike McFadden of Minnesota are all involved in Senate or gubernatorial races.  Their ambitions are noble, but it begs the question of whether or not the examination of their history in private equity could be threatening the reputation of currently active deal professionals.

Romney’s Mistake

On Thursday, Politico wrote an article summarizing the current state of the private equity-politics relationship. According to the article — and the various advisors, pundits, and private equity professionals interviewed within — there needs to be a distinction between the political rejection of private equity and the political rejection of Romney.

Supposedly, Romney’s biggest flaw was being a poor candidate, not being a private equity professional. The article states, “Advisers to the 2014 generation of PE candidates say that Romney failed to educate voters about the real role of private equity in the financial system, instead making an unconvincing argument that the industry is all about job creation.”

It continued, “Romney largely failed to present a positive account of his time in finance; when he pushed back on the Obama campaign’s attacks, he did so feebly and too late.” In short, his private equity past was less problematic than his inability to effectively parry the related attacks.

The New Guys

The 2014 candidates — Gomez, Rauer, Honour, and McFadden — have emphasized that they will not make the same mistake. Each has explained that Romney, “provided a useful blueprint on how not to run for office as a private equity executive.” His inability to effectively discuss matters that were “deeply alien to most Americans” — namely LBOs, international tax havens, and private equity in general — left him disadvantaged.

In the Politico article, one private equity executive mentioned he thought the industry should be portrayed more realistically and more candidly —  “We’re not in business to create jobs. We’re in business to earn a return on investments for investors. Sometimes you create jobs. Sometimes you lose jobs.”

However, this approach may backfire. As Dan Primack explained in response to Politico, “It was [the private equity] deals, particularly ones involving large amounts of bank debt and occasional layoffs, where Romney ran into deep political troubles. And they are the same types of deals — at least broadly speaking — that the new PE candidates were known for.”

Other candidates are supposedly planning on focusing on their humble origins or private equity’s role in supporting pension funds. But will their attempts really change the public perception of private equity?

Another Political Fiasco?

As many deal professionals have realized, Romney’s failed attempt for the White House yielded a “caricature” of the private equity industry to be embedded in the minds of average Americans. The result was harsher scrutiny from both the private and public spotlight, new regulations, and a scramble to preserve reputations.

What will happen if the new group of PE politicians suffer similar defeats? Since none are running for the presidency (yet), the ramifications will likely be less dramatic. But the question still remains — can the private equity industry endure another political barrage? Will more regulation follow? What if they win?

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