Mitt Romney is taking a lot of heat for his past role as a founding partner of Bain Capital, but the political debate fails to recognize the importance of private equity and venture capital investments in building American businesses and creating jobs.
The pundits focus on the financial rewards that Bain Capital received from well-placed investments in companies like Staples and Dunkin’ Donuts, yet there is little discussion about the great risks required to reap great rewards or the costs to private equity investors for the gambles that didn’t pay off.
Since its founding in 1984, Bain Capital has invested in approximately 350 companies, but a good deal of its success stems primarily from a handful of organizations. While the firm declined to provide a complete list of companies supported by its investments, an analysis by the Wall Street Journal found that 10 deals out of 77 companies Bain worked with during Romney’s 15 year tenure as CEO produced more than 70 percent of the dollar gains.
Of the rest, 22 percent went bankrupt or closed their doors by the end of the eighth year after Bain first invested, sometimes with substantial job losses. An additional eight percent ran into so much trouble that “all of the money Bain invested was lost,” the WSJ reports.
However, although they don’t deny that there have been failures along the way, Bain Capital disputes the high percentage of bankruptcies some have attached to its record.
“[F]ewer than 5% of our portfolio companies over the past 28 years have filed for bankruptcy while under our control. This figure is consistent with the broader economy and compares favorably considering the risks associated with private investing,” Bain Capital said in a statement.
“Suggestions of a higher number in media reports earlier this year are simply false and were based on a flawed methodology that excluded literally dozens of investments, and included companies that we did not even own at the time of bankruptcy,” the statement adds.
Furthermore, it should be noted that the WSJ number is based on a 15 year sampling as opposed to the company’s full 28 year history.
But that aside, one thing that neither party disputes is Bain’s success in producing returns for investors.
“[B]ain produced about $2.5 billion in gains for its investors in the 77 deals, on about $1.1 billion invested,” the Journal reports. “Overall, Bain recorded roughly 50% to 80% annual gains in this period, which experts said was among the best track records for buyout firms in that era.”
Just a sampling of the companies* that made this type of success possible include: AMC Entertainment, Aspen Education Group, Burger King, Burlington Coat Factory, Clear Channel Communications, Domino’s Pizza, Dunkin’ Donuts, Guitar Center, Sealy, The Sports Authority, Staples, Toys “R” Us, Warner Music Group, and The Weather Channel.
There were also many failures along the way. The story of GST Steel doesn’t end as well as, say, Staples — whose CEO spoke on behalf of Bain and Romney at the Republican National Convention. But private equity is just like any other business: There are risks involved. Both the business owner and the private equity firm know going in that there might not be the sufficient demand or, as in the case of GST Steel, insurmountable financial woes.
If a start-up fails, a private equity firm, which risked some of its own capital, may take a financial hit. But risks and restructuring aside, the important thing about private equity is that it enables business growth and job creation.
This is all lost in the political debate, which pits Bain Capital’s successes – which were lauded at the recent Republican National Convention in Tampa Aug. 27-20 — against the supposed heartlessness of private equity decried at the Democratic National Convention the following week.
The sound bites, however, don’t adequately explain the role of private equity, venture capital, and angel investors in the American economy. Simply put, private equity is one of the many ways in which a new or under-financed company can get off the ground.
Bain is among 2,670 private equity firms in the U.S. whose investments currently support 15,680 companies that employ approximately 8.1 million Americans, according to the Private Equity Growth Capital Council (PEGCC).
As TheBlaze reported last July, startups are an essential part of sustaining the long-term economic growth of our economy. While government can help foster new business development, it generally can do very little to provide the initial capital and support needed to get a business off the ground.
“A 2008 study by the Boston Consulting Group found that since the 1980s operational improvement as a source of value increased two-fold to more than one-third of value creation, and the 2012 study finds that operational improvements are the primary source of value created by private equity,” according to PEGCC.
And for those critics who continually claim private equity engages in “asset stripping,” they fail to realize this makes no financial sense. Think about it: “A shell of a company will be steeply discounted — not a business in which partners would be comfortable investing,” PEGCC explains.
It’s in the firm’s interest to ensure the success of their client(s) not only because their own capital is involved, but because they stand to benefit far more from trading off a healthy business than one that’s dying on the vine.
As for Bain Capital, it became famous for its hands-on approach to working with its clients, which stemmed from its partners origins at the consulting firm Bain & Company.
“Until [the late 1970s] the business of consulting had been kind of hit-and-run: a firm would take on a client to help with a particular issue, provide some analysis, and then send the client on its way. Bain did things differently,” writes Sridhar Pappu writes for The Atlantic.
“Bainies, as they were known, became deeply involved with the companies they advised, learning everything about their businesses, the industries they worked in, and the competitors they were up against. When an analysis was finished, Bainies didn’t pack up and leave. They stayed with the company, making sure it continued to apply the lessons it had learned,” Pappu adds.
Along with investing, Bain, in its capacity as a private equity firm, has helped restructure financially struggling companies so as to help them avoid bankruptcy and total ruin.
Bankruptcy doesn’t necessarily equal “long-term business failure,” as the WSJ puts it, and some of these struggling companies emerged from reorganization healthier, stronger, and more financially sound.
And while some critics claim the number of firms that ran into financial trouble during Romney’s time as CEO is indicative of poor business acumen, there is something else that should be noted: This number reflects the business style of Romney and his former Bain cohort.
Bain was investing in “riskier deals,” Steven N. Kaplan, a finance professor at the University of Chicago’s Booth School of Business told the Journal. “For every one that went bankrupt, they had one that was a screaming success.”
This isn’t a secret. Bain’s success in the world of private equity, and the effect it has had on the overall economy, is well-known and has even been acknowledged by Obama campaign surrogates.
During an interview on NBC’s “Meet the Press,” New Jersey Mayor Cory Booker said in no uncertain terms that the White House needed to “stop attacking private equity,” before adding that he found those types of attacks “nauseating.”
“To me, we’re getting to a ridiculous point in America, especially that I know I live in a state where pension funds, unions and other people are investing in companies like Bain Capital,” Booker said. “If you look at the totality of Bain Capital’s record, they’ve done a lot to support businesses, to grow businesses.”
While Booker, and then later former President Bill Clinton, had to walk back these pro-private equity statements, but their initial reactions to the Obama campaign’s attacks are telling.
“I don’t think that we ought to get into the position where we say, ‘This is bad work,’” the former president said of private equity during a May interview on CNN. “This is good work.”
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*Citing privacy concerns, Bain has declined to release a full list of the companies it has invested in. Click here for more detail on how the WSJ conducted its research. This story has been updated.