UPDATED JULY 17, 2012
The Obama campaign has drawn blood from its attacks on Mitt Romney’s tenure as head of private equity firm Bain Capital, which has been a big issue in every political campaign in which Romney has run. The president’s team has bashed the former Massachusetts governor for Bain’s practices of closing plants, laying off workers, gutting pensions and benefits, and moving jobs to cheaper venues offshore.
Some of these things happened while Romney was running Bain, some when he had left, and others are in dispute. And I think some of Team Obama’s demonization of Bain is way over the top.
Still, the Bain years are central to Romney’s claim that he has the business experience to turn America’s economy around. I’ve looked at this issue before, and it’s time to revisit it, with the help of Michael Kranish and Scott Helman’s excellent book, “The Real Romney,” which I’m reading now.
Romney often touts his experience as a venture capitalist, funding Staples, Sports Authority and other businesses.
But that was early on, and Bain quickly switched to the more lucrative business of private equity, or leveraged buyouts, as they called them back then. Leveraged buyouts, or LBOs, were hostile or friendly takeovers of established companies using borrowed money.
Romney, wrote Kranish and Helman,
..bought into the broader ethic of the LBO kings, who believed that through the aggressive use of leverage and skilled management they could quickly remake underperforming enterprises. Romney described himself as driven by a core economic credo, that capitalism is a form of “creative destruction.”
Bain was at the forefront of a shareholders’ revolution in American capitalism, as Benjamin Wallace Wells reported in a fine cover story in New York magazine last year. Private equity was a change agent, ousting entrenched CEOs, firing deadwood, and making companies more efficient and profitable for their true owners, private or public shareholders.
But “the lucrative deals that made Romney wealthy could exact a cost. Maximizing financial return to investors could mean slashing jobs, closing plants, and moving production overseas,” Kranish and Helman wrote.
Romney was a pioneer of another private equity strategy—getting companies to borrow money not to invest in their businesses but to pay investors fat dividends, even in their first year of ownership.
As Josh Kosman wrote in his critical book about private equity, “The Buyout of America”:
Bain Capital was the first large PE firm to make a serious portion of its money not from selling its companies or listing them on the stock exchange, but rather by collecting distributions and dividends, which in this context is the exact opposite of reinvesting in a company. Bain Capital is notorious for its failure to plow profit back into its businesses.
And why would it? Private equity firms look for outsized returns for their investors, which include big pension funds and university endowments. The firms usually stay in a company for three to five years, then exit with a handsome profit or cut their losses.
The bottom line: Under Mitt Romney, Bain Capital helped forge major changes in American capitalism. He did a superb job for his partners and investors and made a huge fortune. He acquired deep knowledge of how companies work, their strengths and weaknesses, and how to fix them.
But he didn’t build businesses for the long haul or focus on creating jobs. As a candidate, he’s adopted the same supply-side tax-cut nostrums that failed miserably during the George W. Bush administration. There seems, in short, to be a disconnect between Romney’s brilliant business mind and his cautious, conventional candidacy.
So, Mitt Romney’s experience at Bain may tell us a lot about him, but it doesn’t say much about what he would do as president. That’s why we have campaigns, right?
Also read: Obama Draws Blood on Outsourcing at Bain