Bain Capital is Really that Relevant

June 9, 2012

By Melissa Bynes Brooks

There is frequent commentary and political ads about the record of former Governor of Massachusetts and presumptive Republican presidential nominee Mitt Romney, during his reign at Bain Capital.

Despite the criticism, many Americans do not know what Bain Capital is. Others on the street are asking themselves, “Why should I care?” and “How does this affect me?”

They are cynical about the relevancy of the firm’s operations to their livelihood and ability to survive on a daily basis in this staggering economy which includes higher food prices, fuel prices, and unemployment rates.

So what is Bain Capital?

Bain Capital , is one of the world’s leading private investment firms that sells shares to individuals and invests in securities issued by other companies. Bain Capital manages approximately $60 billion in assets. They began initially with venture capitalism, a strategy that requires investors to take an equity stake in a developing or struggling company that might otherwise not have easy access to capital. Their advisors make private equity, public equity, leveraged debt asset, and absolute return investments across multiple sectors, industries, and asset classes.

Private equity firms will sometimes pool funds together to take very large public companies private. Many private equity firms conduct what are known as leveraged buyouts (LBOs), where large amounts of debt are issued to fund a large purchase.

In layman’s terms, a business will be purchased to increase its marketability in order to unload it later for a higher price. In most cases the business may be sold to another corporation, private equity firm, or be taken public.

The main objective of private equity is to reward investors.

Mitt Romney, who earned degrees from Harvard Law and Harvard Business School, was the founder of Bain Capital. He led the company from 1984 through 1998. During that time, Bain invested in 77 businesses. A Wall Street Journal analysis found that Bain made $2.5 billion in gains for investors from those businesses and did successfully turn around many of them.

In fact last month, to the dismay of many of President Obama’s supporters, former President Bill Clinton stated that Mitt Romney had a “sterling business career” as chief executive of Bain Capital.

“Why should you care?”

Because while the earnings for investors may look good on paper, one could venture (pardon the pun) to say that Mitt Romney was exceptionally good at helping the rich get richer and the poor get poorer.

And even when firms like Bain Capital often took substantial payments in the form of dividends and fees, some of the targeted companies would fail.

Of the 77 businesses, 22% either filed for bankruptcy reorganization or closed their doors by the end of the eighth year after Bain first invested, sometimes with substantial job losses. An additional 8% ran into so much trouble that all of the money Bain invested was lost.

Although Bain produced stellar returns for its investors, most of them were from a small number of its investments. More than 70% of the dollar gains were produced by 10 deals only.

Some of those companies, too, later ran into trouble. Four of the 10 businesses on which Bain investors scored their biggest gains, landed in bankruptcy court.

Some experts, while conceding that available studies don’t provide a direct comparison, said the rate at which the firms Bain invested in ran into trouble appears to be higher than experienced by some rival buyout firms during the era.

“How does this affect you?”

Once in control, private equity firms typically cut costs at the acquired company, a strategy that sometimes includes layoffs and restructuring.

One such example occurred in Miami, Florida.

It started in 1995, when Romney’s Bain Capital targeted the company that became Dade Behring, which made blood-testing machines and performed animal research at its Miami campus. Bain borrowed heavily to buy the company and closed a factory in Puerto Rico to improve the bottom line. About 400 lost jobs there. Then in 1997, Bain shuttered Dade Behring’s Miami operations, costing another 850 jobs and a $30 million payroll in the community. Before growing debt consumed the company, Bain executed its exit strategy and made $242 million.

This is all relevant to our staggering economy regarding future potential job gains or losses.

Mitt Romney has stated that he created more than 100,000 net jobs through his work in the private sector, and more jobs as governor than President Obama has created since taking office. Albeit, during a much more conducive economic environment than current times.

However, the first claim is unproven, and the second is misleading.

While it is true that the private equity firm Bain Capital, which Romney headed from 1984 to 1999, invested in many companies that went on to add jobs, there is no thorough count of the jobs gained and lost in all the companies in which Bain invested. And it’s highly debatable whether Bain, and Romney, deserve credit for all of the jobs created, particularly when there were other investors or executives who launched or ran the companies and then new owners in later years.

On the other hand, it is on the record that the economy was losing more than 700,000 jobs per month when President Obama took office. Since then and through May 2012, the economy has added 4.3 million private sector jobs over 27 consecutive months of job growth, an average of 158,000 jobs a month.

The pace of monthly job losses slowed dramatically soon after President Obama and Congress enacted the Recovery Act in February 2009.

Private employers added 82,000 jobs to their payrolls in May, while losses in federal, state, and local government employment held the total payroll employment gain to 69,000 jobs.

This means there has been “less government growth,” exactly what Mitt Romney and the Republicans are advocating for.

Hopefully, this data will highlight the significance of Mitt Romney’s business practices with Bain Capital. He prioritized earnings on a balance sheet over the job security of employees.

I think this is a no brainer regarding his intentions for the broader American economy.

Melissa Bynes Brooks is the editor of BrooksSleepReview.

Contact information: melissabynesbrooks@comcast.net

Follow on Twitter @Mlbbrooks

References

Bain Capital (2012). About Bain Capital. Retrieved June 8, 2012, from http://www.baincapital.com/AboutBainCapital/Default.aspx

Caputo, M. and Leary, A. Times/Herald Staff Writers. (2012). In Miami, Story of Profits and Layoffs Highlights Debate over Mitt Romney’s Tenure at Bain. Retrieved June 9, 2012, from http://www.tampabay.com/news/business/in-miami-story-of-profits-and-layoffs-highlights-debate-over-mitt-romneys/1211253

Center on Budget and Policy Priorities (2012). Chart Book: The Legacy of the Great Recession. Retrieved June 9, 2012 from http://www.cbpp.org/cms/index.cfm?fa=view&id=3252

House Budget Committee Staff (2008). CBO Confirms Large Deficits and Weak Economy. Retrieved June 9, 2012, from http://democrats.budget.house.gov/sites/democrats.budget.house.gov/files/documents/09.09.2008_CBO_Summer_Baseline_2008.pdf

Investopedia (2012). Private Equity. Retrieved June 8, 2012, from http://www.investopedia.com/terms/p/privateequity.asp#axzz1xGViJ8QC

Liptak, K. (2012). Bill Clinton, Predicting Obama Win, Calls Romney’s Business Career ‘Sterling.’ Retrieved June 9, 2012, from http://politicalticker.blogs.cnn.com/2012/05/31/bill-clinton-predicting-obama-win-calls-romneys-business-career-sterling/

Maremont, M. (2012) Romney at Bain: Big Gains, Some Busts. Retrieved June 9, 2012, from http://online.wsj.com/article/SB10001424052970204331304577140850713493694.html

Robertson, L. (2012). Romney’s Shaky Job Claims. Retrieved June 9, 2012, from http://factcheck.org/2012/01/romneys-shaky-job-claims/

Advertisements