While Rauner has fiercely attacked public pensions, public pensions have been very good to Rauner. He owns no less than three homes in the Chicago area: a 6,900-square-foot palace in a tony suburb just north of the city and a pair of units downtown, including a penthouse overlooking Millennium Park that is just a short walk to the private equity firm that has made him so wealthy. There, the fees that for years his private equity business charged public pensions mean that, during Chicago’s brutal winters, he and his wife can choose between the waterfront villa they own in the Florida Keys and a $1.75 million condo at a Utah ski resort. Other options include the sprawling property the couple owns near Yellowstone National Park in Wyoming, a pair of ranches in Montana, or the penthouse overlooking New York’s Central Park that they bought for $10 million. When this little-known prince of private equity announced his candidacy for governor in 2013, the Chicago Tribune compared him to an earlier private equity governor who was so rich, it was often viewed as a political liability. Yet whereas Mitt Romney owned six homes, Rauner had nine.
Montgomery, of the teachers union, said that while Rauner and the other two private equity governors in the United States like to “brag about all the money they made for teachers, like they’re do-gooders working in a soup kitchen or something. The part they never tell you about are the multimillion dollars they charge each pension for providing all this help.”
Rauner’s former firm GTCR is one of the thousands of private equity partnerships in the United States that collectively manage hundreds of billions of dollars. GTCR raised a $3.25 billion fund in 2011; another $3.85 billion for its 11th fund, GTCR XI, which closed in 2014; and another $5.25 billion last year for GTCR XII. The general partners, as those who run a private equity firm are called, might throw a bit of their own money, but it’s the “limited partners” who provide the bulk of the cash that firms use to buy up and invest in promising businesses they find.
The universe of limited partners includes foundations, university endowments, wealthy individuals — and pension funds. Rauner once estimated that pensions accounted for half to two-thirds of the money he and his partners had raised.
The pensions truly are limited partners. They write checks but remain passive investors who receive occasional reports about how everything is going and maybe an invite to an annual gathering, where the general partners typically try to wow pension staffers and trustees, some of whom might welcome a free trip to some enviable destination.
There are two primary ways that fund managers get rich off the country’s pensions, a pot that exceeds $10 trillion, including both public and private funds. First are the management fees that any private equity firm, venture capital firm, or hedge fund charges. That’s the money the firm takes off the top to keep the lights on and pay their own salaries, along with those of the analysts and others they have in their employ. According to Crain’s Chicago Business, GTCR takes 1.5 percent, rather than the more customary 2 percent, but that’s still a comfortable amount. At that rate, GTCR would take in $75 million on a single $5 billion fund. Every successful investment ends with the “liquidity event” that lets everyone get paid — a company goes public, say, or sells to a larger enterprise. Typically, the partners take a 20 percent share of that revenue, called “the carry,” before passing along the remaining profits to the limited partners.
How much can “the carry” mean for a firm’s partners? In 1999, Rauner told the Chicago Sun-Times that his firm had generated annual returns of 40 percent over the previous 19 years. After fees, he said, his limited partners averaged an annual return of 30 percent. Anecdotal evidence would suggest that Rauner was exaggerating somewhat. Data from the Washington State Investment Board, a longtime limited partner in Rauner’s firm, published by Fortune in 2011, showed that investors in GTCR’s seventh fund (2000) earned an annual 22 percent over 10 years, while its eighth fund (2003) was providing a return of 27 percent a year. That’s far higher earnings than a safe government bond. But look at the take for the private equity partners: Even a $2 billion fund like GTCR VII earning 22 percent a year would have generated roughly $12 billion in profits over 10 years. GTCR’s cut on such an investment, assuming the standard 20 percent carry, would have been $2.5 billion.
But there’s evidence that private equity firms aren’t satisfied with even those extraordinary profits. The Dodd-Frank financial reform required the Securities and Exchange Commission to more closely monitor private equity firms, which the SEC began doing in 2012. Two years later, the SEC revealed that of the roughly 400 private equity firms the agency had examined, more than half had either charged unjustified fees and expenses, or didn’t have the controls in place to prevent such abuses. Many were inflating the fees they charged, Mary Jo White, then chair of the SEC, told Congress, “using bogus service providers to charge false fees in order to kick back part of the fee to the adviser,” which is to say, themselves. A year later, two giants of private equity were fined for bad behavior. Blackstone paid nearly $39 million to settle an SEC investigation into such unfair practices as failing to disclose that it had negotiated a discounted rate from an outside law firm that continued to charge its limited partners much higher price. KKR paid almost $30 million to settle charges that it unfairly required its limited partners to shoulder the cost of $338 million in “broken deal” expenses — having failed to allocate any of these expenses to the general partners for years.
A new law in Illinois, passed after former Gov. Rod Blagojevich’s impeachment and imprisonment, imposed strict new campaign contribution limits. An exception was made, however, for the wealthy. If a candidate spends $250,000 or more on their own race, the caps are lifted for everyone in that race. Rauner gave $27.5 million to his own campaign and raised millions more from a coterie of moguls, including fellow Chicagoans Sam Zell and Kenneth Griffin, a hedge fund manager who ranks as Illinois’s richest person. The New York Times’s Nicholas Confessore, who in 2015 investigated the outsized influence of just 158 wealthy families on politics, found that the $13.6 million Griffin and his family contributed to Rauner in 2014 was more than 244 labor unions donated, combined, to his Democratic opponent.
Rauner’s opponents in both the primary and general elections sought to use wealth and his private equity record against him. One ad that aired during the Republican primary featured the death of three women at a pair of nursing homes linked to GTCR — GTCR had co-founded their parent company, and Rauner sat on its board. (The Rauner campaign called the ads “shameful” and noted that the company GTCR had helped found was bankrupt and in receivership by the time of the three deaths.) The Daily Herald discovered that Rauner was claiming tax breaks on three of his homes, though he was entitled to use only one for an exemption. (Rauner paid the back taxes he owed on the extra exemptions.) Other coverage showed that he had falsely claimed residency in Chicago when his daughter sought to attend a well-regarded public high school in the city and then made a $250,000 donation to the school after she was accepted. (“My daughter was highly qualified to go to that school,” Rauner said during the campaign.) The Chicago Tribune found SEC filings showing that GTCR had no less than six investment pools registered in the Cayman Islands, collectively worth hundreds of millions of dollars. “Bruce Rauner makes Mitt Romney look like Gandhi,” a former general counsel for the Illinois Republican Party said that fall.
Rauner won every county in the state outside of Cook County, home to Chicago. His attacks on the state’s public pensions did little to undermine him — in no small part because his opponent, incumbent Pat Quinn, had himself championed a 2013 law that attempted to squeeze cost-of-living increases for retirees. (An orange snake dubbed “Squeezy the Pension Python” represented the pension in one of Quinn’s political ads.) Yet this was still deep-blue Illinois. Though Rauner had said the state should cut a dollar from its $8.25 an hour minimum wage, voters approved an advisory ballot initiative calling on lawmakers to raise it. Though Rauner had campaigned against another initiative calling on Springfield to impose a 3 percent tax on income over $1 million, the millionaire’s tax passed with 60 percent of the vote.
Give the whole piece a read. Rauner’s approvals are in the toilet and J.B. Pritzker (D. IL) has been leading Rauner by double-digits. Let’s not get complacent though. Let’s make sure the Blue Wave hits Illinois hard. Click below to donate and get involved with Pritzker and his fellow Illinois Democrats campaigns: