No right or wrong in Bain Capital argument
By Allan Sloan,
There are plenty off silly, time-wasting political arguments going on as the 2012 campaign mercifully approaches the homestretch. But perhaps the most foolish and time-wasting involves Bain Capital, the private-equity firm that Mitt Romney left a dozen years ago, but from whose investments he still draws a hefty income.
Democrats, as you know, claim that Bain is a job-destroying vulture operation, which echoes what some of Romney’s Republican competitors said. By contrast, Romney and his campaign claim that Bain is a noble, job-creating enterprise. Let’s settle this once and for all, okay? Who’s right? Neither. Despite buyouts being a numbers-intense business, there are no reliable statistics about jobs created or destroyed by private equity; no one in Buyout Land knows or wants to know about it. Bain and its fellow buyout barons don’t care in the slightest about whether they create jobs or destroy them. All they care about is making money for their investors and themselves, not necessarily in that order. (Also bogus: the debate over whether Romney presided over Bain’s purchase of outsourcing firms, as my colleague Dan Primack points out on Fortune.com.)
If the managers think there’s money to be made by expanding and improving a business that they’ve bought, they will try to expand and improve it. If they think they can make more money by loading additional debt onto the company and sucking out the proceeds in dividends and fees, they’ll load and suck. If they think there’s more money to be made by firing all the U.S. employees and moving operations to China, they’ll do so in a heartbeat. They’re neither moral nor immoral when it comes to U.S. jobs and U.S. society. They’re amoral — they don’t care one way or the other, as long as what they’re doing isn’t illegal.
I’ve been watching private equity at work since the 1980s, when it was known by the more accurate name “leveraged buyouts,” or LBOs. “Leverage” means using borrowed money. That’s why I prefer “leveraged buyouts” — buyouts funded by borrowing — to the meaningless “private equity.” The LBO industry adopted the private equity moniker in the mid-1990s when “LBO” came into disrepute because some large buyouts cratered. Buyout companies didn’t change what they did; they changed what they called it.
Let me give you a simplified, not-so-theoretical example of the kind of thing that works beautifully for the buyout folks and their investors but works badly for the country at large. It’s the kind of thing that has happened with some of the Bain buyouts that Democrats are using to flog Romney.
Let’s say that an LBO firm spends $300 million to buy a company and borrows $200 million — two-thirds of the price — to finance the purchase. The buyout firm’s investors thus have only $100 million invested. The company’s value doubles to $600 million because of luck, skill or both. The company then borrows another $200 million — two-thirds of the increased value — and uses the cash for a payout to the investors, who have now recovered more than they put in and still own the upside potential. (Managers get a piece of the profit; I’m ignoring that to keep the math simple.)
Employees of the now more-heavily indebted company are at greater risk because the company is more vulnerable to failing if anything goes wrong. But the buyout firm’s investors have already made out well. Then the company runs into trouble. Workers lose their jobs, but investors and the LBO firm have come out ahead.
This “financial engineering” feels yucky to non–financial types — and to some financial types as well. But it’s what buyout firms are paid to do. Both sides in the political game know this — Democrats have happily accepted funds from buyout magnates in previous election cycles and will resume their courting when the next cycle begins. And to repeat what I said earlier: There are no reliable statistics about whether buyouts add more U.S. jobs than they destroy.
Got it? See why I say that the whole argument over private equity and jobs is bogus? On to the real debate. Health care and tax rates, anyone?
Sloan is Fortune magazine’s senior editor at large. To read his previous columns, go to postbusiness.com.