America has been learning a lot lately about “the Bain way.” The damning 28-minute video “When Mitt Romney Came to Town,” put out by a pro-Newt Gingrich super PAC, and the new book “The Real Romney,” by Boston Globe reporters Michael Kranish and Scott Helman, have shed light on the strategies that Mitt Romney’s old private-equity firm, Bain Capital, used to generate outsize returns for its investors.
Make no mistake: Under Romney’s leadership in the 1980s and 1990s, Bain was a top-performing private-equity fund. According to an internal 2000estimate, the fund achieved annualized returns of an astounding 88 percent from 1984 to 1999 for its institutional investors, including state and corporate pension funds that invest the savings of millions of American workers. It also made a fortune for Romney, whose net wealth reportedly exceeds $250 million.
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For Kranish and Helman, the Bain way is an “intensely analytical and data-driven” approach to studying companies, what makes them successful or not, and how to boost their competitiveness.
The video “When Mitt Romney Came to Town” is understandably less sympathetic. To the filmmakers, bankrolled by the Winning Our Future super PAC, the Bain way is nothing less than “turning the misfortunes of others into . . . enormous financial gains.” The film spends most of its time interviewing people who lost their jobs and much of their savings after working at various companies that Bain bought, milked and sold to generate those huge profits.
Yet, there is another version of the Bain way that I experienced personally during my 17 years as a deal-adviser on Wall Street: Seemingly alone among private-equity firms, Romney’s Bain Capital was a master at bait-and-switching Wall Street bankers to get its hands on the companies that provided the raw material for its financial alchemy. Other private-equity firms I worked with extensively over the years — Forstmann Little, KKR, TPG and the Carlyle Group, among them — never dared attempt the audacious strategy that Bain partners employed with great alacrity and little shame. Call it the real Bain way.
Here’s how it worked. Private-equity firms are always eager to find companies to buy, allowing them to invest chunks of the billions of dollars entrusted to them and from which they earn hundreds of millions in fees. One ready source of these businesses is Wall Street bankers hired to sell companies through private auctions. The good news is that when a banker puts together a detailed selling memorandum about a company, chances are very high that company will be sold; the bad news is that these private auctions tend to be very competitive, and the winning bidder, by definition, is most often the one willing to pay the most. By paying the highest price, you win the company, but you also may reduce the returns you can generate for your investors.
I never negotiated directly with Romney; he was too high-level for any interaction with me. Rather, I dealt often with other Bain senior partners, who were very much in his mold. In my experience, Bain Capital did all that it could to game the system by consistently offering the highest prices during the early rounds of bidding — only to try to low-ball the price after it had weeded out competitors.