A lot has been made about Mitt Romney’s career in private equity, which started in 1984 at Bain Capital and ended in 1999 when he left to run the Salt Lake City Olympics. This calculator shows that the annualized return of the S&P 500 during this period was 18 percent (i.e., this was an exceptionally fortunate time for an investor in U.S. companies; the same calculation for the period 2000-2011 results in a 0.5 percent return).
Did Mitt Romney do even better than a passive investor in the S&P 500? Yes, as did most private equity shops during this period. Was that due to the fact that the folks who collected massive fees for managing private equity funds knew something about how to operate a business that had escaped the managers who’d spent their entire lives within a given industry? Not necessarily. Jeremy Grantham, one of the world’s most successful investors, is fond of pointing out that KKR has demonstrated very similar returns to what an investor would have achieved by buying the S&P 500 using the same amount of leverage that KKR used to buy companies. In other words, instead of paying a 20 percent fee to KKR, an investor could have simply bought the S&P 500 on margin and walked away, keeping 100 percent of the fruits of the investment rather than 80 percent. And KKR, instead of working hard to identify exactly the best companies to purchase and the best managers to hire, could simply have bought stocks at random to achieve the same result. (Indeed KKR might have done better with a more hands-off approach; the company offered a full partnership to Ken Lay, the Chairman of Enron, shortly before Enron’s accounting frauds were exposed (see this book excerpt).)
So while there may be other reasons to like Mitt Romney, his ability to outperform the S&P 500 is not necessarily one of them. Anyone who was able to borrow money at an interest rate lower than 18 percent could have beaten the S&P 500 during the period of time that Mitt Romney was involved in private equity.
[Has anyone seen this kind of analysis in a mainstream newspaper article or TV show? It seems odd to report that Mitt Romney was a big success as an investor without noting that so was almost everyone else during the same period of time.]