First published in the Financial Times on 24th July 2012.
The buyout sector is at the opposite extreme from public service in terms of motivations
Is a former private equity boss the right man to take on the world’s biggest government job?
US voters will decide this November in the presidential election, but in the meantime it is worth examining whether the skills that made Mitt Romney $250m are the same as those required by the leader of the free world.
Stating the obvious, private equity is so-called because it does not operate in the public arena. It is a pure capitalist pursuit in which investors buy companies and try to sell them for a capital gain. There is an intense focus on returns for shareholders and rather less concern for citizens as a whole. Generally speaking, corporate social responsibility, sustainability, disclosure and environmental issues are not as much a priority as they are to public companies, charities and government.
Buyout houses such as Mr Romney’s Bain Capital use debt to acquire companies, and in doing so pay less corporation tax than might otherwise have been the case. These companies are run to maximise profits for the owners, rather than for the creation of jobs. Of course private equity can be healthy for an economy, but as a career it is probably at the opposite extreme from the public services in terms of motivations. Attention is not directed towards the common wealth, but enriching the management, buyout partners and their institutional backers. That is the nature of the game. To argue otherwise is bogus.
Most private equity leaders are fairly discreet and prefer to keep their activities and wealth hidden from the media. Rather the opposite of the life any politician must be willing to lead – this is, after all, the age of complete transparency.
Because private equity deals take time to mature and carry is hard to value, many of the industry’s tycoons are worth much more than their magazine rich-list rankings suggest. And those who rise to the top in the profession need to be ferociously interested in accumulating money. By contrast, I would suggest that those who succeed best in politics are much more interested in prizes such as fame and power – and perhaps, who knows, even a belief in doing good.
Private equity is not about courting popularity. It is about picking winners and making those assets sweat. Commercial risk in leveraged buyouts is usually amplified because of borrowings. From time to time such deals fail and restructuring or even bankruptcy ensues. Private equity transactions often involve hard decisions – factory closures, lay-offs, disposals, cuts in capital expenditure and so forth. These choices are usually for the general good of the enterprise, but can lead to collateral damage.
But the public and the media are unforgiving of public figures who state the difficult facts – arguably we prefer charm over honesty. Perhaps that explains why the disreputable New Labour project won three elections, despite taking Britain to war under false pretences and almost bankrupting the country.
Private companies are not democracies – they are quasi-dictatorships. Owners choose who the managers are, whether to pay a dividend, when to sell a business – all the really big stuff.
Orders in corporations owned by private equity can be carried out swiftly – that is why the model works. Meanwhile, the president answers to the people, and must co-operate with his cabinet, Congress, the media and armies of interest groups. Laws take years to enact. Politics mostly moves slowly, after much compromise and debate.
I accept Mr Romney was a governor of Massachusetts for four years, a Mormon bishop and ran the 2002 Winter Olympics in Salt Lake City, so he is not a complete stranger to high office in the public arena. After all, his father was a politician – and he has won the Republican nomination. But all that is chicken feed compared to the challenge of winning the White House – and then doing a decent job if he seizes the trophy.
No doubt he is a great delegator, salesman, talent-spotter and a highly confident, likeable individual. But having spent many years in the private equity industry, I’ve never met a senior partner who shows even a fragment of the selfless devotion to public service that being the president must surely entail. I’m no fan of Barack Obama but to me, Mr Romney’s candidacy simply lacks all credibility.