Like other IRA investors, Romney will pay a 35 percent tax on the funds in his account when he ultimately withdraws them, said Davis, the Romney campaign spokeswoman. Until then, he can use the money in the account to buy and sell stock and other assets, repeatedly reinvesting the money inside the IRA, without having to pay tax rates of up to 40 percent for short-term capital gains. That’s a huge benefit, tax experts say.
Romney’s IRA growth could be dramatic, in part, because he, like other Bain employees, was given access to a type of shares in Bain-backed companies that were often private and low-valued when the employees bought in and then were managed by Bain for growth and an eventual sale or public share offering that would maximize shareholder value.
These “A-shares” were priced by Bain at a fraction of another category of stock known as “L-shares,” which functioned like preferred stock, paying dividends and getting priority for payouts. The A-shares, or common shares, were riskier and thus priced lower, so it was possible that a relatively small IRA investment could buy significant amounts of the A-shares in some companies. The use of a dual-share structure is not unusual in the financial industry, and under financial accounting rules the A-shares must reflect a true market value of the underlying assets. Often, the value of these initially cheap A-shares soared, along with the company’s value.
Consider the example of Physio-Control, which was bought by Bain in 1994. The company, a maker of defibrillators, saw its business take off in the following years, with Bain’s initial investment multiplying 21 times. Under the dual-share structure, the rewards were heavily tilted toward the A-shares. The value of an A-share purchased in 1995 multiplied 445 times in just three years, according to a person familiar with the transaction who spoke on the condition of anonymity. In other words, a $10,000 investment in Physio-Control A-shares would in theory have returned $4.45 million.
Not all deals worked out so well. Bain bought US Synthetic, a maker of bits used in oil and gas exploration, in 1998. By the time the company was sold in 2004, the original Bain investment had multiplied a modest 1.2 times. Under the terms of the company’s dual-share structure, A-shares lost all their value.