Wednesday, November 21, 2012

Private Equity Democratic Style


Private Equity Democratic Style

The following snippet from the November 19th edition of The New Yorker caught my attention:

“When the ads aired [anti-Bain Capital commercials], the Romney Campaign did not respond, but Priorities USA [pro-Obama independent expenditure PAC], to its surprise, fielded bitter complaints from Democrats who were cozy with the private equity industry.  [Bill]  Burton [founder of the PAC] said, “When we first went up, there was a lot of pressure on us from people like Steve Rattner, Cory Booker, Harold Ford, and even President Clinton.  The leaders of our party were telling us to quit. [Plan of Attack: Seeing Spots, Jane Mayer]”

Cory Booker, the Mayor of Newark, made news during the Presidential campaign by criticizing the PAC for putting up the Bain ads on Meet the Press, and then immediately changed his tune in a You Tube video.  It’s not clear to me why he defended private equity in the first place.  Harold Ford, former Congressman and Vice Chairman at Merrill Lynch, then criticized Mayor Booker for withdrawing his criticism of the attack ads in an appearance on Morning Joe.  Given the Congressman’s affiliation with Merrill Lynch, it is not surprising that he defended private equity.

Fund of Funds Pitch (2005)

This post is really about Steve Rattner and President Clinton and their efforts to get me to invest in private equity.  Let’s begin with Mr. Rattner.  In 2002, when I was CIO for the North Carolina Retirement System, State Treasurer Richard Moore asked me to meet with Mr. Rattner and several other people from Quadrangle Group, Mr. Rattner’s private equity firm.  This meeting was, of course, well before Mr. Rattner became the auto-Czar for the Obama administration or his settlement with then Attorney General Cuomo over corruption charges.  Mr. Rattner was a well-connected Democrat trying to raise a private equity fund.  We had a cordial meeting, and I did a bit of due diligence on Quadrangle before concluding that Quadrangle was not a good investment for our plan.  I talked to the State Treasurer about my conclusions, and he agreed.  I called Mr. Rattner’s office, but he was away, so I talked to one of his partners.

A day later, my cell phone rang from an unknown number with a long string of digits.  I answered and heard an echoey voice along with a lot of crackling.  The conversation went something like this:

SR: “This is Steve Rattner.  I ‘m on a boat in the Galapagos Islands calling from a satellite phone.  I’m extremely disappointed that you’re taking a pass on my fund.  We have commitments from number of large pension plans, and we’d like to get North Carolina in as well.”

AS: “You’re in the Galapagos Islands on vacation?”

SR: “Yes, but this is very important to me.”

AS: “Fundraising is going well.  You’ve got a bunch of investors lined up for the new fund.”

SR:  “Yes, but we’d like to get you and the State Treasurer into the fund.”

AS: “I can’t believe you interrupted a family vacation from the Galapagos Islands on something like this.  We’ve made our decision.  Go back to your vacation.  Bye.”

I’m not sure if Mr. Rattner tried to call the State Treasurer, but it wouldn’t surprise me.  After that call, I was even happier that I hadn’t recommended Quadrangle.

I have never met former President Clinton, but I have felt his influence.  A year before the Quadrangle episode, Treasurer Moore asked me to take a look at a fund called Yucaipa, run by someone named Ron Burkle. I decided to rummage around a bit and learn about Yucaipa.  I quickly found that it had a strong connection to CALPERs and was active in union-related investments.  I also found plenty of references to President Clinton’s close ties to Mr. Burkle.  I reported back to the State Treasurer and told him I had a variety of concerns about this potential investment.

About a month later, the Treasurer called me and asked me for a big favor.  He said he’d run across the former President, who had urged him to take a closer look at Yucaipa.  I can only imagine how that conversation went.  He asked me to fly to Los Angeles to really kick the tires.  A week later, I drove into the parking lot behind Yucaipa’s office building in my red Ford Fiesta rental and parked between a Jaguar and a Mercedes.  After a bunch of small talk, including Mr. Burkle’s bemusement that I’d stayed in a run down motel in Hollywood, we got into his PowerPoint presentation.  

As he summarized the benefits of Yucaipa, including its access to proprietary deal flow and his extensive experience, he also offered me a seat on the Advisory Committee for the fund.  Large investors are customarily offered membership, so this wasn’t a big deal.  Our conversation went on roughly as follows:

RB:  “We hold two advisory committee meetings a year, one in Los Angeles and the other in Chappaqua.  You know President Clinton is an advisor to our fund.”

AS: “Ron, I drove up in a Ford Fiesta and stayed in a pretty run down motel, I’m not interested in meetings in Chappaqua.  Let’s get back to your presentation.”

Fortunately, I’d put together some other meetings on the West Coast.  I reported back to the State Treasurer, and Yucaipa went off my radar screen for good.  However, there was a never-ending list of politically connected money managers who came calling, and who probably agreed that the anti-Bain ads were very unfair.

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