Thursday, November 6, 2014

A Good Night For Private Equity: But Can They Govern?

A Good Night For Private Equity: But Can They Govern?

In Illinois, Massachusetts, and Rhode Island, three candidates for governor with close ties to private equity won election.  Bruce Rauner, founder of GTCR, defeated Illinois Governor Pat Quinn.  Treasurer Gina Raimondo, formerly of Point Judith Capital, was elected Governor of Rhode Island, and Charlie Baker, a partner at General Catalyst, was elected Governor of Massachusetts.  As you’d expect, all three efforts were well financed, and all three candidates were attacked for their links to private equity.

You’ll have to look elsewhere if you are interested in why these candidates won their respective contests.  In the end, the messiness of busted PE deals and high fees generated by private equity didn’t serve as a roadblock to elective office even though these kinds of matters showed up in negative ads and newspaper articles. 



All three former PE executives now have to make the quick transition from campaigning to governing.  However, the moving from a private sector to a public sector mentality will be the biggest challenge.  Obviously, Gina Raimondo already has four years of experience in the public sector as Treasurer of Rhode Island.  Moreover, her efforts to reform Rhode Island’s public pension have enlightened her on the challenges of managing in the public sector.   When we look back in four years time, Rauner, Raimondo, and Baker may turn out to have been good governors.  However, there’s little in their experience in the private equity business that will be useful in governing a state. 

For the most part, government operates nothing but extremely difficult enterprises.   It’s nothing like investing in portfolio companies.   As an investor, PE executives are expert at using government to subsidize business expansion and relying on the tax code to drive returns.  Instead of relying on the government for corporate welfare, Rauner, Raimondo, and Baker have become the government.  Those subsidies and tax benefits will now play havoc with their budgets. 

When portfolio businesses failed in the world of PE, Rauner, Raimondo, and Baker knew how to deal with the problem: sell off assets to raise cash, file for bankruptcy, and/or just write it off and walk away. Problem solved.  Those strategies don’t work when you are the government.  In the public sector, problems fester, and while a governor has significant power, legislators aren’t as pliable as a hand-picked board of directors.  In other words, government is an alien world for executives steeped in private equity.

There’s at least one additional challenge.  Private equity conducts most of its business without much publicity. When something goes wrong, it may merit mention on the business pages of the newspaper, but that’s about it.  Treasurer Raimondo has been operating under continual public scrutiny since 2010.  Governors-elect Rauner and Baker are going to have to get used to operating under the spotlight. 

Two of the governor-elects are Republican and one is a Democrat.  However, it hardly matters.  Having served in state government twice, I quickly learned that political ideology took a back seat to the day-to-day problems of managing and delivering services to the public.  Raimondo, Rauner, and Baker might be best served by forgetting everything they learning in private equity.


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