In Defense of Private Equity Job Skills

December 19, 2011

Presidential candidate Mitt Romney has come under fire for his time spent running the successful private equity firm Bain Capital LLC. Opponents have questioned whether he was a job-destroyer, not creator, and whether the skills he acquired translate well to the job of running the United States.

They do indeed, argues Steven N. Kaplan, a professor of entrepreneurship and finance at the University of Chicago Booth School of Business, in a recent guest article for Bloomberg.

Kaplan first looks at return on investment. The average private equity firm has beaten the broader S&P 500 market by a healthy 20 percent over the past 25 years. And this outperformance has not just gone to the “1%” of wealth investors but has benefitted pension funds for public employees and university endowments, as well.

What’s more, during Romney’s tenure, Bain Capital beat the field of PE funds. Bain raised five funds that all outperformed the typical PE fund, with four in the top quartile of performance.

“In other words, Bain Capital and Romney delivered spectacularly well for their customers, better than other PE firms that on average outperformed the public markets. Today, those customers include the California State Teachers’ Retirement System and the Teacher Retirement System of Texas,” writes Kaplan.

Private equity firms achieve this performance in three ways. 1) Through financial engineering, which includes high-powered incentives to top executives to meet their targets; 2) governance engineering, which involves closely monitoring and advising the company’s board; 3) operational engineering, bringing in consultants and executives who can help portfolio companies become more efficient.

Bain Capital pioneered the use of consultants in private equity investments by using its sister company, Bain & Co. More than 20 years later, Kaplan says, nearly every top private equity firm has adopted this practice.
So yes, the data does support the fact that Romney’s experience in private equity is relevant to his quest for the presidency. And his ability to create policies that encourage job creation and growth.

What’s your view? Do you think private equity job skills translate well into other areas of industry or government? Add your comments below.

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