“In those hundreds of businesses we invested in, tens of thousands of jobs net-net were created. I understand how the economy works.”
— Former Massachusetts governor Mitt Romney, talking about layoffs versus job creation for Bain Capital during a GOP debate in Iowa, Aug. 11, 2011
Romney essentially uses this same response every time he has to address skepticism about his record on job creation in the private sector. Before entering government, he spent 25 years both working as a management consultant and leading the resoundingly successful investment firm Bain Capital, which he co-founded.
A Bain prospectus obtained by the Los Angeles Times shows that the company yielded an astronomical 88 percent average annual internal rate of return under Romney’s leadership. The American Enterprise Institute said, “Few, if any, VC [venture capital] firms have ever matched Bain Capital’s performance under Mitt Romney,” although Stanford economics expert Alex Gould noted in the Times piece that some of the firm’s highly profitable short-term investments may have distorted the lofty average.
Bain invested mostly in start-ups early on but eventually shifted its focus to the cutthroat world of leveraged buyouts, which involves buying controlling shares in a company, with the purchase financed mainly through borrowing. (That’s the “leverage.”) If all goes well, the value of business increases well beyond the debt load, and investors make huge profits on their investments.
We wondered if much downsizing was required to yield these profits. Not all the information is public, so we couldn’t know for sure. Bain also doesn’t track employment at the companies in which it has invested, as noted by The Boston Globe.
Regardless, we found plenty of trustworthy news accounts detailing layoffs at the companies Bain acquired under Romney’s leadership.
Romney’s campaign provided current employment numbers for some of Bain’s greatest success stories: Staples has 89,000 workers, the Sports Authority 15,000 and Domino’s 7,900. Based on that information, we know the private-equity firm did indeed create jobs during Romney’s tenure by providing seed capital and advice to these start-ups.
But that list does not include the leveraged buyouts. By itself, it’s not enough to prove a net-net gain in employment numbers.
For that, we need to compare the number of people laid off with the number of people hired, which requires old jobs figures for all the companies Bain purchased under Romney.
Neither Bain nor the Romney campaign gave us that information when we asked for it. Bain also declined to answer with a yes or no whether its companies created more jobs than it eliminated during Romney’s tenure.
Still, we know from past news reports that Bain businesses have laid off lots of workers. A 2008 report from Politico provided details on some of the jobs losses:
— Ampad, which Bain acquired in 1992, cut 385 jobs, closed two U.S. plants and was $392 million in debt by the time Romney left.
— Dade International, which Bain acquired in 1994, laid off more than 1,800 employees during Romney’s time with the firm.
— LIVE Entertainment laid off 40 of 166 workers following a Bain buyout of the company.
The Ampad layoffs turned into a campaign issue during Romney’s unsuccessful bid to unseat the late Edward Kennedy from his Senate seat in 1994.
Bain and its investors also reaped enormous profits from some of the companies that went bankrupt under its control, providing Romney critics with fuel to criticize his business record.
The Boston Globe noted that Bain earned $100 million on a $5 million investment in Ampad, due, in part, to the tens of millions in management fees and other payments Bain collected while overseeing the company.
Pavel Savor, an assistant professor of finance at the University of Pennsylvania’s Wharton School, said leveraged buyouts can go either way in terms of employment numbers.
“Sometimes the firms buy businesses that are bloated and then streamline the operations,” he said. “Other times, it involves growing a business. It depends on the circumstances.”
Saikat Chaudhuri, an assistant professor of business who specializes in mergers and acquisitions at Wharton, said private-equity firms “do use some aggressive tactics for cost reductions,” but noted that companies that succeed because of cuts may create new jobs in the long run.
Chaudhuri said it’s hard to gauge whether leveraged buyouts have an overall negative or positive impact on employment.
“We can’t get information on how they’re performing, and that’s what makes it so hard to evaluate these things,” he said.
The Pinocchio Test
Romney’s record at Bain proves that he can produce staggering returns for investors, but it is unclear if that record tells us anything about his ability to create jobs. His campaign offered no definitive proof that Bain added more jobs than it eliminated while Romney headed the firm. For all we know, he pulled his “tens of thousands of jobs” number from thin air.
Still, the evidence available suggests Bain probably did create more jobs than it eliminated, especially when it comes to start-ups — as opposed to those leveraged buyouts, in which the firm perhaps saved more jobs than it eliminated.
Overall, we can’t say for sure that Romney was right. We also can’t say that he spoke falsely. However, we do not feel comfortable awarding a prized Geppetto check mark without definitive evidence.
UPDATE, JAN. 10: Since Gov. Romney began saying he helped create “100,000 jobs,” we took a deeper look into this issue and have changed our ruling to Three Pinocchios.
Check out our candidate Pinocchio Tracker