Bain Capital or Bane Capital?

Posted on May 29, 2012

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At this point it seems clear that the main narrative of the Obama campaign is going to be centered around the notion that Mitt Romney was a ruthless and rapacious destroyer of jobs during his tenure as a Senior partner at Bain Capital. There has been a lot of smoke, hyperbole and superheated rhetoric swirling around, going back before the GOP primaries, even to Romney’s first go at the GOP nomination in 2008.

Intuitively, there is a lot at face value that suggests that Romney’s involvement with Bain Capital is simply a political football.  Was Romney a smart, ethically sound businessman or was he a mean-spirited, anti-worker, elitist, who took special glee at handing out pink slips en masse?

That’s what we need to settle in order to assess his claims that he has special insight and know how in getting America working again.

I’m not going to get into the weeds of the history of Bain Capital. For that, if you’re interested, you can Wiki ‘Bain Capital’. What I do propose to outline is a succinct analysis of the accusations and to what degree they have any validity to them.

A starting point is the answer to the question, “What is Private Equity?”  In simple terms, it is a type of capitalist venture predicated on the notion that there are under performing businesses out there that are in dire need of revitalization, without which, they will eventually go belly up. Putting it another way – rescuing and restoring to profitability, companies that are sucking canal water.

One of the erroneous concepts that Obama’s minions and Super Pacs are trying to foist upon voters is that Private Equity transactions are typically ‘hostile takeovers’. This is seldom, if ever the case. Usually, troubled businesses are open to consider proposals from PE firms like Bain and invite them in to look over the business and discuss survival options. The proposal?  The PE firm will bring in significant capital from private investors to rescue and improve the performance of the publicly traded business.

In the process, the business in question changes its status from publicly traded to privately held. Before any proposal is made to the company’s leadership and majority stockholders, the PE firm will have its accountants scrutinize the financials of the business and all of the relevant factors that must be taken into consideration in order to outline a plan for improved performance.

The idea that Romney just waltzes in to an executive office uninvited and announces, “I hate to break the news to you, but we’re taking over your company and we’re going to fire thousands of people and eventually bankrupt it”, is preposterous. To many, who gather their opinions from sound bite narratives, this notion seems plausible. The problem is that it couldn’t be further from the truth.

What the political hacks are relying on is that they can obfuscate  facts and persuade people to believe that Private Equity is precisely the same as the Mergers and Acquisitions and Leveraged Buyouts executed by ‘Corporate Raiders’ in Hollywood movies like ‘Wall Street’.

One of the false equivalencies of the Obama camp is the nature, purpose and objectives of Private Capital. It is not standard strategy for a PE firm to intentionally ‘crash’ an acquired firm. This is not a preferred business model at any PE firm, even though there is political value in alleging such to be the case. On the contrary, building value, and fostering success, growth and profits are the benchmarks that distinguish the best of breed Private Equity firms.

There are certainly abundant examples of predatory capitalism where an ‘investors be damned’ gambit is engaged in by Wall Street – enough to fill entire volumes; but the business model of Private Equity won’t kill many trees in the printing. The better these privatized businesses perform, the more money Romney and Bain make.  I hate to oversimplify that, but in broad terms it just is that simple.

There are a round of ads circulated by the Obama campaign and its surrogates that feature former employees of businesses that were acquired by Bain Capital. The employees tell personal stories of how their lives were devastated by the effects of the involvement of Bain.

Now, if you want to present an emotionally charged perspective devoid of objectivity, I can’t think of a better source than an employee that has been laid off. Such personal testimonies are going to evince an impulse of pity on the part of the viewer in many instances. Working class Americans, like you and me, feel sorry for people who lose their jobs, especially when it seems as though there is an external force behind the job loss.  It’s one step from that to personalizing the disappointment, pain and regret to one particular individual. “It’s Romney’s fault that my life sucks”.

The truth minus the hysteria is a little different. No matter whether a business is a private entity or publicly traded one, there exist certain realities. If market conditions change and a business is no longer able to sustain its current payroll, jobs will be destroyed. Unlike government at all levels, which has no concept of ‘tightening one’s belt’ – private businesses cannot afford to keep employees on the roster when faced with loss of revenue.  It’s not as simple as that, argues Timothy Noah, in The New Republic:

“What’s appalling is that Bain managed to do pretty well even when the steel company failed. Brooks and Strassel both point out that Bain ended up pumping $100 million into GT Technologies. But neither has the bad manners to note that when GT Technologies failed Bain still ended up (according to Reuters) at least $12 million ahead on its eight-year investment. And that doesn’t even count the $900,000 the company annually extracted in management fees through 1999. Such grotesquely unequal outcomes for those at the top and those at the bottom aren’t at all unusual in the private equity business.”

There is a logical disconnect here.  The hand ringers on the Left ruminate about inequality of outcomes.  But on the other hand, if they found out that their boss all of a sudden decided that the company was too profitable and by consequence, told them that their salary was going to be cut in half, because the firm was going to be transformed into a charity – they’d hit the ceiling. 

It’s clear that some on the Left view job security as a higher virtue than the unfettered, unencumbered mobility of the free worker.  This is of course, reflected in their ideal of the government and unionized workers who are nearly impossible to fire or lay off.  This is what accounted for the unbridled hysteria displayed directly after the passage of restrictions on collective bargaining in Wisconsin.  

Those inclined to see firings as an essentially negative feature of capitalism, would find a great deal more to dislike in the world of publicly traded corporations than at privately held ones. For example, in a publicly traded corporation, when the quarterly reports come in and the earnings are unsatisfactory, there is immediate pressure to cut costs – including payroll. Shareholders demand short term gratification. 

Meanwhile,  at a private firm, the management can look at results with a more long term perspective. If the case can be made that retaining the workforce is a critical element of the mid and long term goals and objectives of the business plan, employees are kept, not fired. This was precisely the outlook that was more prevalent at the firms that Romney attempted to rescue.

One of the businesses whose former employees are now giving bitter soundbites from, is GST Industries.  GST was failing when Romney tried to revive it. Before Bain came into the picture, the payroll had already gone from 4,500 to under 1,000.  Bain persevered with GST for 8 years, over which time they secured capital infusions of 100 million dollars in order to turn the company’s finances around. Romney had been gone from Bain two years when GST finally limped into insolvency. The culprit for the lost jobs? Foreign steel dumping by China and other countries, not malfeasance on the part of Bain Capital. 

When major corporations cut 10,000 workers in one fell swoop in order to satisfy shareholder profit expectations, it is pretty much business as usual.  When one company Bain couldn’t save despite its best efforts – loses 850 jobs, you’d think that Mitt Romney was Henry F. Potter, the despicable banker in the Frank Capra Holiday classic, ‘It’s a Wonderful Life’.  But don’t look for perspective or balance in an election season.

Another oft repeated accusation is that Romney simply bet ‘other people’s money’. False. While it is the essential nature of Private Equity and Venture Capitalism that both individual and institutional investors provide the bulk of the funds used to acquire the struggling companies, Mitt and the other partners at Bain had personal skins in the game themselves. The benefit from doing so is obvious.

When Bain participates in the risk / gain equation of these ventures, it is more likely that there will be every motivation to improve, not degrade the finances of these businesses. That is a key attribute to Private Equity that distinguishes it from so many of the dicey investments offered by the Wall Street banking houses.  Nancy Perry, in an article about Bain in Fortune magazine describes Bain:

Notoriously secretive about itself and its work for clients, Bain has over the years been labeled the ”KGB of Consulting,” or a ”Moonie commune” run by the ”Reverend” Bain.   Bain consultants seem possessed by a mission to increase the ”total economic value” of their clients. Like religious zealots, they single-mindedly dedicate themselves to improving their customer’s competitive position. Business is a holy war that the client must win and the competition must lose.

On the surface there is no mystery to Bain & Co.  If it were a person, it would be articulate, attractive, meticulously well groomed, and exceedingly charming. It would exude Southern gentility. But it would also be a shrewd, intensely ambitious strategist, totally in control. The firm would be, in short, Bill Bain, its Tennessee-bred founder.”

It would seem that pulling out all the stops to regenerate a failing business is a disreputable mode of operation, if you listen to Romney’s critics in the Democrat party. That shoring up a company’s finances is the surest path towards retaining and increasing jobs, appears to be a foreign concept to Obama and his cohorts and the media.

With reference to jobs, Bain has a worldwide professional staff numbering close to 800. Not all are MBAs as the popular image suggests. To keep costs down and numbers up, the firm has over the years employed a growing number of recent college graduates, which it styles ‘associate consultants.’ Giving recent college graduates good starting jobs? What an outrage? I thought government was the only legitimate job creator. Weren’t we told that Private Equity only kills jobs?

But wait a minute, I hear you saying – “Didn’t I hear something from partisan hack, Bob Shrum and some others, accusing Bain and Romney of getting bailouts?” Yes you did and no they (Bain) did not.  Kevin D. Williamson, of National Review Online tackles that argument in his well outlined column that you can check out here.  A quick summary is that Bain and Company (the consulting side of the business), which Romney was not involved with at the time, got itself in a situation very similar to that of the firms that Bain Capital, the PE subsidiary, typically rolled up its sleeves and straightened out.

To put it more simply, Romney’s boss got his tail in a crack by getting too avaricious and Mitt was called in to take charge and turn the situation right side up.  He was very successful in doing so. Part of the details is that one of Bain’s creditors was the Bank of New England.  The Bank of New England for reasons having nothing to do with the Bain debt, wound up going bankrupt. As settlement with banking regulators operating as trustees, Bain paid 85% of the money still owed on the balance sheets.

This did not take place on Romney’s watch and if you are at all familiar with the typical proceedings of a failed bank, you know that creditors (or their assignees) are pretty relieved – ecstatic, in fact, to recover 85 percent of any outstanding funds.

The other item had to do with the failed steel company. Bain had purchased insurance for the benefit of the employees from the Pension Benefit Guaranty Corporation – an independent subsidiary of the Federal Government. When the steel firm went under, years after Bain was no longer associated with it, the employees were able to recover the money they had invested in their pensions because of Bain Capital’s foresight. It takes an enormous leap of logic and a great deal of intellectual dishonesty to extrapolate such a situation into a ‘bailout’ scenario.

Getting on to the impact of Bain on the national employment picture, Romney has cited an estimate of 100,000 jobs created by the successes of Bain, during the time Romney was a managing partner. Those numbers cannot be independently verified due to the fact that Bain did not maintain statistics of net jobs generated by its activities.

Nevertheless, given the fact that such notable, national powerhouses such as Staples, Sports Authority and Domino’s Pizza experienced solid growth by virtue of Bains’ expertise, it seems logical to assume that the jobs figure Romney points to is likely to be a good approximation.

The Wall Street Journal did a study recently in which they analyzed the investment activity of Bain Capital while Romney was there. They report:

Seventeen of the 77 private-equity targets filed bankruptcy petitions, usually Chapter 11 reorganization, or closed their doors by the end of the eighth year after Bain’s investment.

Of these, at least five clearly were still controlled and run by Bain at the time. In three other cases, Bain was a minority investor in a deal run by another buyout firm. In some of the remaining cases, Bain still held a small stake or had just sold out when the bankruptcy filing or shutdown occurred, while in other cases the trouble struck several years after Bain’s exit.

Some perspective here is important. Bain Capital had a 78% success rate in mending small companies that had been destined to collapse. That is a statistic that would not embarrass anyone in the world of finance! Many of the firms that did collapse long after Bain no longer was in control of them, did so for reasons having primarily to do with the ‘Dot Com’ bust and another economic downturn in 1999 – 2000.

Bain Capital was profitable. How dare they?  Shouldn’t they have made a lot of wild, irresponsible gambles and relied on the taxpayers to bail them out? The fact that they made money is indicative of the fact that private investors who partnered with them were able to sustain the interests of a diverse assortment of typically small to medium sized institutions such as private and public pension funds. Part of the return for services rendered in PE investing comes in the form of a vehicle known as a ‘Dividend Recap’. As a PE company borrows money against the collateralized assets of the acquired or leveraged business, they then take a dividend out of the new debt proceeds from capitalization.

Whether Bain, Romney and the other partners should have reaped sizable profits from these ventures and such strategies as Dividend Recaps, depends on your point of view.  If you think that such firms should provide their expertise gratis – restructuring failing businesses from a purely altruistic motive, then you will probably think Mitt Romney became rich by ‘exploiting’ someone. If on the other hand, you have no problem with someone creating a successful business model that is profitable and helps others profit and that in the process, breaks no laws or violates any recognizable code of ethics, you probably are inclined to see Mitt in a favorable light. 

It is easy for critics to paint the enormous accumulation of wealth that Romney’s firm realized as winning ugly.  Looking at the Wall Street banks in terms of their ruthlessness and rapaciousness quotient, makes firms like Bain Capital look a bit more like Mr. Rogers’ neighborhood in comparison.

No one exposed to the long running political narrative of the political media and the partisan political attack machine, would be surprised to find out that PE firms donate generously to GOP office holders and candidates. But you would only be seeing part of the picture. Democrats and their party are up to their necks in campaign dollars from PE firms, as they are from the financial industry in general. Consider this as reported by the Sunlight Foundation:

With $22 million contributed this election cycle alone, according to Influence Explorer, top recipients look like a who’s who of powerful politicians. House Speaker John Boehner, R-Ohio, and Republican Whip Eric Cantor, R-Va., have collected large amounts, along with Sen. Bob Menendez, a New Jersey Democrat who recently served as chairman for his party’s senatorial campaign committee and is himself facing relection this year.   Top recipients over time also include Sen. Chuck Schumer, D-N.Y.,  another former head of the DSCC. Meanwhile, independent groups are jumping into the fray. The Private Equity Campaign Council, headed by longtime Democratic donor and fundraiser Steven Judge, today released a new video that touts how private equity helped turn a struggling Michigan-based manufacturer into a major defense contractor.

Just today, it was reported that the Obama campaign is the recipient of a substantial donation from a couple of key executives of … Bain Capital!  What???  Say it isn’t so, Barry.

OpenSecrets.org data indicates there are at least a handful of Bain Capital employees (and their families) who seem more impressed with the president than he is with their employer: they have given $41,278 to his campaign, and OpenSecrets.org identified at least three who have given a total of $96,400 to a joint fundraising committee operated by the Obama campaign and the Democratic National Committee.  Obama has also collected $16,000 from employees of Bain & Company, the consulting firm that started Romney’s career and helped spawn Bain Capital.

And guess what, Obama has no plans to return the money. And just a few weeks ago on May 14th, Obama attended a fundraiser in New York City that was hosted by Hamilton E. James, the chief operating officer and president of Blackstone. The financial firm Blackstone is one of the world’s largest private equity fund businesses. Blackstone has been deeply involved with the Democrat party for years.

Would anyone suggest, with a straight face, that Blackstone had a strictly enforced policy of retaining every single employee at every business they dropped their anchor at? If a former principal of Blackstone or any other major Democrat contributor from Wall Street had decided to enter politics as a Democrat – would the Democrats consider that individual unfit for office? Would there be any discussion about ‘excessive profits’?

At the end of the day, do we know what Mitt Romney’s inclinations as President will be? In a strict sense, the answer is no. Mitt Romney may decide to advocate the interests of the financial sector with complete disregard to the effects that such an imbalance could have on consumers of investments and of folks on ‘Main Street’.

There are some things that we do know. We do know that Obama’s reckless sessions at the Blackjack table, betting that increasing the debt exponentially with ‘stimulus’, has wreaked enormous damage to the economy. We do know that government has grown on his watch.

We do know that Obama says one thing publicly about Wall Street to his political base and something quite different to them in private conversations – just as he does with foreign leaders like Russian President Medyedev, when he thinks the microphone is shut off.

We also know that Mitt Romney has promised that he would take the regulatory and tax burdens off small businesses which are the job creating engines of the economy. We know that he has pledged to develop an energy policy that offers new jobs, increases energy independence and facilitates new revenue to tackle the Red ink our government has accumulated.

I’ve told you before, that I’m not giving Romney a blank check. He’s made a lot of promises and he’s going to have to live up to them after the election, because the Tea Party and conservative Republicans aren’t going anywhere. We’ll hold his feet to the fire and in some instances, we’ll probably need to.  And of course, let’s also not be naive.  Wall Street is heavily invested in Romney.  That they expect nothing other than for Mitt to fight for ‘Truth, Justice and the American Way’, requires a greater leap of faith than I am willing to take.

My goal though, as I stated at the beginning of this piece, is to at least separate fact from fiction as to Romney’s business bonafides and reputation and let you decide for yourself, whether you can in good conscience check the box next to his name this coming November. 

As for me?  Given the choices involved, I’ll take a first term Romney over a lame duck Obama 100 times out of 100.

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