Mitt Romney’s private-equity past puts ‘creative destruction’ in spotlight

As Mitt Romney touts his business experience in the Republican presidential primaries, he has started facing questions about his abiding faith in “creative destruction.” That’s the idea that when new ways of doing business replace the old, closing factories and laying off scores of workers are painful but necessary steps to building a more efficient economy.

Possibly no industry better embodies this worldview than private equity, the controversial and highly lucrative business that Romney helped shape in the 1980s and 1990s and that, in turn, earned him millions of dollars and molded his perspective on how the economy works.

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Romney’s rivals sometimes cast him as just another Wall Street banker. But the former Massachusetts governor comes from a highly specialized brand of work that — unlike many jobs on Wall Street — frequently gets into the guts of how a business operates and then obsessively asks a question posed by chief executives everywhere in corporate America: How do we maximize profits?

The results have been good for investors and, some experts argue, good for the broader economy as companies have grown more efficient. But for those who lost their jobs as private equity firms churned out profits, the sting of seeing their companies turned into vehicles for greater efficiency is harder to live with. And as the 2012 campaign continues, Romney’s past could lead voters to wonder not just about private equity but also about the costs of a modern capitalism that embraces creative destruction.

Bain Capital, co-founded by Romney in 1984, uses the same basic business model as other private equity firms: Buy up a company, increase its value and then reap a profit by selling it or taking it public. The funds used for the acquisitions come from investors, such as pension funds and university endowments, plus money borrowed from banks. This debt is what creates enormous pressure on private equity firms — once known as leveraged buyout, or LBO, firms. They have to move quickly to make a company more efficient, or risk defaulting.

The result is that the industry has on the whole been good for American business, said Steve Kaplan, professor of entre­pre­neur­ship and finance at the University of Chicago Booth School of Business.

“The basic evidence on private equity is they make the companies more efficient,” Kaplan said.

For decades, private equity deals have been criticized for leading to massive job cuts. A paper this year by economists and U.S. Census Bureau researchers tracked employment at companies bought out by private equity firms from 1980 to 2005. They found that employment at the companies that had been targeted declined 3 percent over two years after a buyout and by 6 percent over five years.

But then the economists looked at whether new offices, factories or retail outlets were opened by the purchased companies. Here they found that those added jobs offset some of the losses. Net relative job losses, they found, were less than 1 percent.

Some employees whose companies were bought, though, say the job cuts were unforgettably brutal.