Gawker’s Bain Docs and the Private Equity Knowledge Gap

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We will never stop using this photo.
We will never stop using this photo.

As everyone on the Internet knows by now, Gawker's John Cook today published a massive, 950-page pile of documents related to Mitt Romney's investments at Bain Capital and its related entities.

A cadre of financial reporters, most notably Fortune private equity reporter Dan Primack, are playing down the importance of the documents, calling them "worthless," and saying that most of what's contained in them has been widely known for years. (Primack also tweeted that he "had most of the 'Bain files' Gawker published for a while," which is like saying you saw Green Day live in '91 before they totally sold out.)

But if you don't dig through private equity documents on a daily basis, there's actually quite a bit to peruse. You might even learn something.

I haven't made it through all 950 pages, but much of what I've seen is year-end financial statements and private placement memos (PPMs) for the Bain funds in which Mitt Romney has (or had) substantial investments. Those kinds of documents are routinely sent to private equity investors, and are meant to convey everything an investor should know: What kinds of things the fund is invested in, along with costs, profits, and cash left over.

It's no secret that Mitt Romney has millions of dollars tied up in Bain's private equity funds, but the documents have some fun-if-not-monumentally-important factoids, like that one of Romney's funds, Sankaty High Yield Partners II, made investments in un-Mormon things like casinos and cigarette vendors, and loaned millions to the owner of the National Enquirer.

Second, there are documents related to Romney's retirement package. Gawker makes a fuss about the fact that Romney's Bain retirement package contains holdings in Sankaty Credit Opportunities, L.P. and Sankaty Credit Opportunities IV, two entities that were created after Romney has said he left Bain to run the Olympics. To Cook, this sounds like an example of either time travel or an outright lie: "It's difficult to explain an apparent $1 million-plus payment from Bain, made in 2008, as being pursuant to a retirement package that was negotiated in 1999."

But it's not, really, considering that Romney's agreement with Bain expressly permitted him to get stakes in all Bain funds started in the ten years following his retirement. (Gawker has since updated that part of its post with a correction.) So let's chalk this one up as a non-story.

Third, there are documents about Romney-owned funds that have seemingly advocated for policies espoused by the Obama administration. Like Prospect Harbor Credit Partners LP, which told investors in a 2010 letter that if Obama's stimulus expired as a result of a bunch of Republicans getting elected and shutting it down, the markets could experience a "significant fiscal drag."

That sounds bad! Doesn't that mean Romney's financial advisers were admitting that Obama's economic policies were better for the country? Well, not really, because a) the people who manage Romney's money aren't obligated to support his policies, and b) you can dislike a policy even if you believe it will be good for your business.

There's all kinds of other stuff in the Gawker dump, and I could go on all day explaining why most of its revelations are not as scandalous as they appear (i.e. most private equity firms and hedge funds have entities in the Cayman Islands, not just Bain), but that would be boring, and you're probably already thinking of clicking over to TMZ for Prince Harry's naked photos. So let's zoom out a bit.

The important point about Gawker's data dump is not that it shows that Romney was lying about his finances, or that he has made millions of dollars from evil investments. It's that it illuminates the huge gap between the average Gawker reader and Mitt Romney when it comes to matters of money.

When you hear that "we already know" facts X, Y, and Z about Mitt Romney's investment portfolio, that "we" refers to a very small set of people — largely, those who work in the financial sector and those journalists who cover either private equity or the Romney campaign. (How many swing state voters could even tell you that LP stands for "limited partner?" How many have ever laid eyes on a 13-D?)

That gap – between what Wall Street (and the financial media) knows about private equity, and what the average voter knows about it – has worked in the Obama campaign's favor so far. If you're writing attack ads for an unsophisticated general audience, it's easy enough to use scary-sounding words like "credit default swaps" and "Cayman Islands shell entities" to make Romney's financial arrangements sound nefarious.

Gawker's trove of documents could theoretically narrow the knowledge gap, if journalists who do understand how private equity works are willing to explain what it means (and why it's not an all-out scandal) to laymen, and if those laymen are patient enough to sit through the explanation. If that could happen – and I'm not holding my breath – it could make private equity less of a bogeyman.

More likely, though, is that Gawker publishing a bunch of Bain documents marked "CLASSIFIED" and "FOR INTERNAL USE ONLY" will make it look like they've uncovered an even larger chunk of the Hercule Poirot mystery that are Mitt Romney's finances. It may not be a scandal, but it looks like one. And readers who want to understand Mitt Romney's private equity investments more deeply will have to hope that someone who does understand things will explain them again and again, ad infinitum, until it sinks in.

That's not likely to happen, given the "over it" posture Primack and others like Joe Weisenthal have adopted toward the Gawker dump. But perversely, given how incoherent and scary the documents look to a layman, their indifference may give the Bain files an even louder voice in the political debate about Mitt Romney's finances, even if what's inside is nothing strictly new.