Mitt Romney puts his business background at the front of his campaign message. As the current front-runner for the Republican nomination, his background is going under increased scrutiny. Since his business background is in private equity, the industry should stop and wonder whether all of this publicity will be good or bad for private equity.
Hopefully people will not be as confused by private equity as they are with whether “Mitt” is short for Mittens. In listening to hearings on private equity and venture capital, many congressmen seem to think that private equity is only about leveraging healthy companies with lots of debt, firing lots of the employees, then quickly ripping them apart, and selling the pieces. If successful. Otherwise, they fire most of the employees and merely plunge their portfolio companies them into bankruptcy.
There is the obvious problem in how you define success. The Wall Street Journal looked at the Bain portfolio and found that 22% of its portfolio companies either filed for bankruptcy or shut down. The story failed to add any context about whether that is better or worse than average. Lots of companies run into trouble. There were over 13,000 Chapter 11 bankruptcy filings in fiscal year 2010. Add in some percentage of the 1.5 million chapter 7 bankruptcies that were businesses, not individuals.
Certainly, Bain Capital made money for its investors. The Wall Street Journal found that Bain produced about $2.5 billion in gains for its investors who had put in $1.1 billion in capital.
Even in the Walk Street Journal story, there is a disagreement about the right measuring stick and which failures should be attributed to Bain. In some cases, the failure came after a partial Bain exit.
Of course, the statistics can’t cover what would have happened to the business if Bain failed to step in or private equity failed to take an interest. They may have failed anyway.
I suspect the answer to whether private equity is good or bad will be twisted around Mitt Romney. His supporters will laud his business success and his detractors will attack his job cuts and business failures. (I lived with Mitt Romney as governor and don’t have a position on candidacy. He was mostly limited by the state legislature in what he could do, a similar position that Congress limits Presidential action. )
In the end, private equity will likely come out of the election cycle bruised and battered.
- The Mittster and the Job Figures Posted by John Cassidy in the New Yorker
- Romney at Bain: Big Gains, Some Busts by Mark Maremont in the Wall Street Journal
- What Makes Small Businesses Sink or Swim?
- What is Mitt Romney’s First Name from Vanity Fair
- Unites States Trustee Program Annual report Fiscal Year 2010 (.pdf)