Pension Funds Get Queasy over Private Equity

By Cristina Alesci and Devin Banerjee
Mitt Romney’s campaign for the Republican Presidential nomination may be creating funding headaches for his former colleagues in the private equity industry. Romney’s opponents have characterized Bain Capital—the firm he helped found in 1984 and left in 1999—and other buyout managers as corporate looters who enrich themselves at the expense of ordinary workers. The issue is likely to remain in the news should Romney win his party’s nomination and face President Obama in the general election.
With public scrutiny focused on private equity funds, pension funds are more reluctant to invest and may ask for more details on job creation and push for lower fees, according to officials and trustees at public pensions. “Pension funds have boards. They don’t want to be giving money to an industry that has a taint,” says Tony James, president of Blackstone Group, the world’s largest private equity firm. “Similarly, boards of directors don’t want to sell their company to organizations they don’t view as respectable. So it could be very damaging for the industry.”
The debate comes as the industry is competing for a shrinking pool of investor dollars. Fundraising has fallen off sharply since the onset of the global financial crisis, staying below $100 million each quarter, according to London-based researcher Preqin. In the second quarter of 2007, at the peak of the leveraged buyout boom, private equity firms raised almost $214 billion. In the fourth quarter of 2011, they raised $52.4 billion.
Public and private pension funds in the U.S. provide 42 percent of the capital for all private equity investments, according to the Private Equity Growth Capital Council in Washington. Public employee pension funds, which must answer to ordinary workers, are sensitive to protracted debates about managers’ compensation and whether buyouts create value and jobs, says one official who asked not to be named because he wasn’t authorized to speak on the topic. “The political attacks against Romney and Bain will definitely come up when firms pitch us their new funds,” says William R. Atwood, executive director of the Illinois State Board of Investment, which oversees $10.4 billion in pension funds. “You’d be crazy not to bring it up.” The Illinois pension board had $621.3 million, or 6 percent of its assets, in private equity as of Dec. 31, according to its website.
Bad publicity has hurt private equity firms in the past. Last year, Blackstone lost out on a deal to manage hedge fund investments for New York City’s public pension funds after the company’s chief strategist suggested retiree benefits were too generous.
Bain tends to be less reliant on pension funds than its rivals. When Romney set out to raise Bain’s first fund in 1984, he steered clear of pension funds, pursuing high-net-worth individuals who contributed about $37 million, according to a person who worked with Romney at the time. Kohlberg Kravis Roberts’s co-founders, by contrast, received early capital from Oregon’s and Washington’s pensions, with the latter contributing $12 million to KKR’s first fund in 1982.
The success of Bain’s first fund, which generated a 61 percent average annual return, according to marketing documents from 2004 obtained by Bloomberg, allowed Bain to charge a premium for its investment services. Bain collects 30 percent of the profit on its investments, the highest in the industry. Pensions historically have been less willing to pay the higher performance fees. In a recent fund, Bain relied on pensions for about 9 percent of client assets. Alex Stanton, a spokesman for Bain, declined to comment.
One Bain executive expects the storm to blow over. “Our limited partners have been with us for 28 years, many of them,” Bain Managing Director Stephen Pagliuca said in an interview at the World Economic Forum in Davos on Jan. 27. “We just keep our heads down and try to build value.” Pagliuca also said that pensions will come to rely more on private equity to meet their growing obligations to workers because traditional assets like stocks and bonds won’t return enough. Still, with Romney’s candidacy keeping the spotlight on the industry, Atwood of the Illinois State Board of Investment says there’s bound to be an impact. “We all know that private equity managers make a lot of money, and we know how they do their business,” he says. “But when it’s on the front page, it causes us to think twice when making investment decisions. Private equity is more lucrative when it’s kept quiet.”
The bottom line: Pension funds, which provide 42 percent of the private equity industry’s capital, may pull back amid criticism of Romney and Bain.
Alesci is a reporter for Bloomberg News in New York. Banerjee is a reporter for Bloomberg News in New York.http://tourism9.com/    http://vkins.com/

Senate GOP's next move awaited in nominations spat

WASHINGTON (AP) — President Barack Obama’s appointments to two key agencies during the Senate’s year-end break ensures that GOP senators will return to work Monday in an angry and fighting mood.

Less clear is what those furious Republicans will do to retaliate against Obama’s “bring it on” end run around the Senate’s role in confirming nominees to major jobs.

While Republicans contemplate their next step, recess appointee Richard Cordray is running a new Consumer Financial Protection Bureau, and the National Labor Relations Board, with three temporary members, is now at full strength with a Democratic majority.

Obama left more than70 other nominees in limbo, well aware that Republicans could use Senate rules to block some or all of them.

The White House justified the appointments on grounds that Republicans were holding up the nominations to paralyze the two agencies. The consumer protection agency was established under the 2010 Wall Street reform law, which requires the bureau to have a director in order to begin policing financial products such as mortgages, checking accounts, credit cards and payday loans.

The Supreme Court has ruled that the five-member NLRB must have a three-member quorum to issue regulations or decide major cases in union-employer disputes.

Several agencies contacted by The Associated Press, including banking regulators, said they were conducting their normal business despite vacancies at the top. In some cases, nominees are serving in acting capacities.

The Federal Deposit Insurance Corp., at full strength, has five board members. The regulation of failed banks “is unaffected,” said spokesman Andrew Gray. “The three-member board has been able to make decisions without a problem.” Cordray’s appointment gives it a fourth member.

The Comptroller of the Currency, run by an acting chief, has kept up its regular examinations of banks. The Federal Trade Commission, operating with four board members instead of five, has had no difficulties. “This agency is not a partisan combat agency,” said spokesman Peter Kaplan. “Almost all the votes are unanimous and consensus driven.”

Republicans have pledged retaliation for Obama’s recess appointments, but haven’t indicated what it might be.

“The Senate will need to take action to check and balance President Obama’s blatant attempt to circumvent the Senate and the Constitution, a claim of presidential power that the Bush Administration refused to make,” said Sen. Charles Grassley, an Iowa Republican who is his party’s top member on the Senate Judiciary Committee.

Grassley wouldn’t go further, and Senate Republican leader Mitch McConnell of Kentucky hasn’t tipped his hand after charging that Obama had “arrogantly circumvented the American people.” Before the Senate left for its break in December, McConnell blocked Senate approval of more than 60 pending nominees because Obama wouldn’t commit to making no recess appointments.

Republicans have to consider whether their actions, especially any decision to block all nominees, might play into Obama’s hands.

Obama has adopted an election-year theme of “we can’t wait” for Republicans to act on nominations and major proposals like his latest jobs plan. Republicans have to consider how their argument that the president is violating Constitutional checks and balances plays against Obama’s stump speeches characterizing them as obstructionists.

Senate historian Donald Ritchie said the minority party has retaliated in the past for recess appointments by holding up specific nominees. “I’m not aware of any situations where no nominations were accepted,” he said. The normal practice is for the two party leaders to negotiate which nominations get votes.

During the break, Republicans forced the Senate to convene for usually less than a minute once every few days to argue that there was no recess and that Obama therefore couldn’t bypass the Senate’s authority to confirm top officials. The administration said this was a sham, and has released a Justice Department opinion backing up the legality of the appointments.

Obama considers the new Consumer Financial Protection Bureau a signature achievement of his first term. Republicans have been vehemently opposed to the bureau’s setup. They argued the agency needed a bipartisan board instead of a director and should have to justify its budget to Congress instead of drawing its funding from the independent Federal Reserve.

Cordray is expected to get several sharp questions from Republicans when he testifies Tuesday before a House Oversight and Government Reform panel.

The NLRB has been a target of Republicans and business groups. Last year, the agency accused Boeing of illegally retaliating against union workers who had struck its plants in Washington state by opening a new production line at its non-union plant in South Carolina. Boeing denied the charge and the case has since been settled, but Republican anger over it and a string of union-friendly decisions from the board last year hasn’t abated.

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