“I have spent most of my life outside of politics, solving real problems in the real economy,” Romney told the Republican National Hispanic Assembly in Tampa on Friday. “My work led me to become deeply involved in helping other businesses, from innovative start-ups to large companies going through tough times. Sometimes I was successful and helped create jobs; other times I wasn’t.”
What Romney rarely brings up, however, is that the corner of the “real economy” where he excelled is a specialized, little-understood world known as private equity. It represents one of the most unsentimental sides of modern capitalism — as Romney’s opponents are sure to point out.
With funds they have raised from big investors, private-equity firms go looking for companies to buy — usually by borrowing more money, which the firm itself is then on the hook to repay. The goal is to unload them a few years later at a big profit.
Private equity is a hard-nosed business, and voters may decide that’s precisely the kind of approach the economy needs to get it back on track. Or through the prism of the 2008 financial meltdown, they may see in private equity — with its focus on short-term gains and its reliance on cheap and easy credit — the same impulses that got the country into a fix in the first place.
“He’s been living off the financial economy and cutting jobs in the real economy. That’s not a recipe for victory, given where most people are now,” said Robert Reich, labor secretary in the Clinton administration. “There is such deep anger, and at best cynicism, at Wall Street and the financial community.”
Perry, who has taken the lead in the latest GOP primary polls, has already signaled that he plans to use the former Massachusetts governor’s years at the private-equity firm Bain Capital as an argument against him.
Free-market ‘big tent’
Citing his own background as a family farmer, Perry said during a tour of the Iowa State Fair: “I wasn’t on Wall Street. I wasn’t working at Bain Capital. But the principles of the free market, they work whether you’re in a farm field in Iowa or whether you’re on Wall Street.”
In an interview, Perry’s chief strategist, David Carney, was more explicit. “I don’t think the country is looking for somebody to be a buyout specialist,” he said.
When Romney was running for president in 2008, he promised autoworkers in Michigan and textile workers in South Carolina that he would “fight to save every job.”
Now he makes no such broad guarantees. Instead, he promises to lead the country into a new era of innovation.
“Raising the productivity of a nation and the prosperity of its citizens depends on two types of innovation — one that improves existing goods and services and another that invents new ones,” Romney wrote in his latest book. “The former may result in reduced employment; the latter generally adds employment.”
In that book, “No Apology,” Romney uses the term “creative destruction” to describe the downsizing that’s sometimes needed to make a company more efficient and valuable.
“Creative destruction is unquestionably stressful — on workers, managers, owners, bankers, suppliers, customers, and the communities that surround the affected businesses,” Romney wrote. “The pressures these groups put on political leaders to clock game-changing innovations can be intense.”
Romney argued, however, that the benefits to the broader economy are worth it.
Economists generally agree.
“From an economic perspective, that’s always what the U.S. economy has done best is to let things fail,” said Douglas Holtz-Eakin, the former Congressional Budget Office chief who served as GOP nominee John McCain’s top economic adviser in 2008.
But Holtz-Eakin added, “That’s a difficult thing to sell in a political campaign.”
Meanwhile, the presumption that what’s good for companies is ultimately good for Americans is being tested as the U.S. economic recovery continues to stall. Corporations have bounced back to record profits, while millions of people have been unemployed for more than six months. Those who still have jobs have largely seen their wages stagnate.
‘Corporations are people’
Thus far, the most memorable line of Romney’s presidential campaign may be his retort to a heckler at the Iowa State Fair: “Corporations are people, my friend.”
That comment — in response to the man’s demand for higher corporate taxes — echoed the very complaint that some have made about Romney’s rise to fortune.
While Romney was making millions buying, restructuring and selling scores of companies for well-heeled investors, his critics say, he was paying too little regard to the human toll behind the balance sheets. In later years, Romney agreed.
In his last bid for the GOP nomination — at a time when the seemingly healthy economy was not high on the list of Americans’ concerns — Romney said the constituencies he served after leaving the business world had given him a different perspective.
“The experience of the last eight years, running the Olympics and being a governor, would make me take an even more sensitive look at the impact of business decisions on the lives of suppliers and employees and others who are involved,” he told the New York Times in 2007.
Romney declined to be interviewed for this article.
Private equity, and particularly a deal of the sort commonly called a “leveraged buyout” in those days, works like this: A firm, such as Bain Capital, raises money from big investors to form a fund. The private-equity firm then acquires companies with money from the fund, but mostly money from lenders.
With the added leverage, firms can buy up enormous companies and turn them around for even bigger gains. But the private equity firm needs cash flow from its acquisitions to keep the banks happy.
At the same time, it has to find a way to make the businesses more valuable. The goal is to be able to sell the company for more than its acquisition price and pay back the bank, with plenty left over for investors.
Sometimes, a private-equity buyout is a godsend for an acquired company and its workers. In other instances, it leaves them decimated and saddled with debt, or in bankruptcy.
The companies acquired by Bain Capital experienced both outcomes. But either way, Bain Capital’s investors almost always reaped big gains.
“Private equity is a little like sex,” said Howard Anderson, a senior lecturer at the Massachusetts Institute of Technology’s Entrepreneurship Center. “When it’s good, it’s very, very good. When it’s bad, it’s still pretty good.”
Romney’s most celebrated success was the launch of Staples. It used a $2 million venture-capital investment from Bain to test its unproven concept that if prices were low enough, small businesses would buy their notepads and paper clips at a store, rather than having supplies delivered in the traditional way.
Another venture into the office-supply business, however, helped derail Romney’s first bid for political office, a 1994 effort to unseat Sen. Edward M. Kennedy (D-Mass.).
During that campaign, Romney was trailed by fired union workers, who blamed the shuttering of an Ampad plant in Indiana on the company’s takeover by Bain. Kennedy ran a blistering ad against Romney in which one worker said, “Basically, he cut our throats.” Six years later, Ampad went into bankruptcy, though Bain’s investors had profited handsomely, with a $100 million return on their $5 million investment.
Romney said he was not involved with the decision to fire the workers. And he insists that overall — or “net-net,” as he likes to put it — Bain during his 15-year tenure created more jobs than it eliminated.
At the time Romney started Bain Capital in 1984, private equity was in its infancy and dominated by bankers, who broke apart companies, stripped them of their assets and fired workers en masse.
Rather than relying on financial reshuffling to create value, Bain said it would use its consulting experience to make companies run better — an approach that has since become a standard in the industry.
“They kind of reinvented private equity and became really quite successful,” said MIT’s Anderson. “They would decide what they could pay, they’d analyze the living Jesus out of the company, and they made the investment where they knew exactly what they were going to do at least for the first three or four months.”
Former colleagues say Romney’s analytical abilities drove the company. “Mitt is wicked smart, and he has the ability to see through lots of facts that aren’t relevant and get right to the thing that matters,” said Robert F. White, who was part of Bain Capital’s original leadership.
And when a takeover company failed as a result of his efforts, Romney told the New York Times in 2007, it would “make me sick, sick at heart.”