Tuesday, May 22, 2012

Tall Tales About Private Equity


PRESIDENT OBAMA started his general election campaign by taking aim at Mitt Romney’s job creation record at Bain, setting off a lively debate over the fairness of the attacks.
I am among those who have been drawn into the argument — there was even a snippet of me defending private equity in a Romney campaign ad.
As a former Obama administration official, I was uncomfortable about being used in a Romney ad in support of his position.
However, I was also concerned that the Obama ads, while narrowly accurate, might be seen to portray Bain Capital (and implicitly, private equity) in an ugly light because a few of the companies the firm invested in went bankrupt while Bain Capital still made money
On Monday, Mr. Obama struck the right balance, emphasizing that he wasn’t attacking private equity but was questioning Mitt Romney’s Bain Capital credentials to be the job creator in chief.
That’s fair, particularly because Mr. Romney himself has been foolishly reweaving history to claim, as recently as last week, that he helped create 100,000 jobs during his time at Bain.
In fact, Bain Capital — like other private equity firms — was founded and managed for profit: ideally, huge amounts of gain earned legally and legitimately. Any job creation was a welcome but secondary byproduct.
The language in one prospectus seeking Bain Capital investors was clear: “The objective of the Fund is to achieve an annual rate of return on invested capital in excess of the returns generated” by other investments. Any job creation was accidental.
In Mr. Romney’s case, his jobs assertion rests heavily on just a few early investments.
Originally hatched to provide venture capital to young enterprises, Bain Capital notched a few such successes, notably Staples and Sports Authority. These were small stakes in companies — about $2.5 million in Staples — over which Bain had little influence.
While I defend the role financiers play in making our economy work, I also concede that Mark Zuckerberg was far more central to the success of Facebook and its 3,200 jobs than the venture capitalists who invested early.
Although Bain Capital sold off those early investments years ago, Mr. Romney takes credit for every job ever created at every company Bain Capital invested in during his tenure — while ignoring jobs eliminated after his departure.
“The steel factory closed down two years after I left Bain Capital,” he said last week about GST Steel, the Kansas City, Mo., company that went bankrupt in 2001. “I was no longer there, so that’s hardly something which is on my watch.”
Meanwhile, when Staples went public in 1989, it had 1,100 employees; at the end of 1998, right before Mr. Romney exited Bain, it had 42,000 workers. Yet Mr. Romney takes credit for the 89,000 employed at the close of 2010.
As the years clicked by, Bain Capital and Mr. Romney smelled the chance to make more money by raising larger amounts. That, in turn, led them toward classic leveraged buyouts — the purchase, often heavily financed by debt, of more established companies.
These enterprises were often what Wall Street describes as “undermanaged,” which means the Bain Capital team could take “aggressive action” that often included cutting costs — read: jobs — to increase profitability.
That’s not wrong; it’s part of capitalism. Whatever its flaws, private equity has made a material contribution to sharpening management. But don’t confuse a leveraged buyout with job creation.
Under Mr. Romney’s leadership, Bain Capital engaged in the less attractive practice of putting more debt on seemingly successful investments in order to take dividends out. In at least four instances of Bain Capital investments during Romney’s tenure, these “recapped” companies, of which two were featured in the Obama ads, subsequently went bankrupt, costing thousands their jobs.
To be sure, some of Bain’s large leveraged buyouts — notably, Domino’s Pizza — added jobs. But Mr. Romney left Bain Capital two months after the Domino’s investment (7,900 new jobs claimed) was finalized.
Aware of private equity’s reputation, Mr. Romney still trots around the country erroneously calling himself a “venture capitalist.”
And in a further effort to deflect attention from the Bain Capital debate, Mr. Romney last week argued that President Obama was responsible for the loss of 100,000 jobs in the auto industry over the past three years.
That’s both ridiculously false (auto industry and dealership jobs have increased by about 50,000 since January 2009) and a remarkable comment from a man who said that the companies should have been allowed to go bankrupt and that the industry would have been better off without President Obama’s involvement.
Adding jobs was never Mitt Romney’s private sector agenda, and it’s appropriate to question his ability to do so.

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