Bain Capitalism 101
Review & Outlook @ WSJ (May 20, 2012)
Watching Obama campaign ads or MSNBC, one could easily come to the conclusion that Bain Capital makes money by destroying the companies it owns. So for voters unsure about the business that Mitt Romney founded but still reluctant to trust the financial analysis offered by community organizers, some perspective might be helpful.
The basic Obama-liberal critique goes like this: Bain buys a company, loads it with debt and then sucks out cash before foisting the wounded business upon an unsuspecting buyer or a bankruptcy court. In the risk-taking world of private equity such a scenario can certainly happen, and it’s true that Bain likes management fees and dividends as much as the next partnership.
But then how to explain the history of Bain Capital? Mr. Romney started the business in 1984. The company has since bought and sold many businesses and executed thousands of financing transactions.
f Bain’s standard operating procedure were to hand the next owner of one of its companies a ticking bankruptcy package, how is Bain still finding buyers nearly three decades later? And who would agree to lend money to a company backed by Bain? Wouldn’t word have gotten around by, say, 1987 that Bain’s portfolio companies weren’t creditworthy?
The liberal critique of private equity assumes that the financial industry is full of saps who have been eager to lose money across the table from Bain for 28 years. This is the same financial industry that the same liberal critics say is full of greedy schemers when it comes to padding their own pay or ripping off consumers. But financiers can’t be both knaves and diabolical geniuses at the same time.
Learning about Bain successes like Staples or Gartner or Steel Dynamics confirms the logical conclusion that Bain had to be creating value along the way—for investors, for lenders, and that means for workers too.