Monday, January 16, 2012

Bain Basics

Venture capital is not exactly a specialty of mine. So as anti-Romneys have stirred the pot by calling Bain bad, I had to read up like of the general public. I have, however, read enough in the past about Romney’s business success and the near unanimous approval of both his business acumen and his ethics that, when opponents with a desperate need to wound his candidacy start claiming negative things about Romney’s predatory practices, I don’t automatically accept their word for it.

Maybe I’m too partisan by now, in my leanings toward Romney’s candidacy, that I’m missing something. But maybe not. Anyway, I have collected a few sources that have explained the Bain Capital experience pretty much to my satisfaction.
This one, from a pro-Romney blog, gives the “Real Story of Romney and Bain Capital.” Romney was asked by consulting company Bain and Co. owner Bain to start a separate venture capital company, where they could, instead of making money only on giving advice, invest money in companies they could persuade to follow their advice and make money on the success. Romney was hesitant and looked carefully at the opportunity before taking it on. He took a year, back in 1984, to raise money to start up the new company, all from private investors. And it took some time before the first big payback came—$2 Million invested in office supply store start-up Staples, which yielded $13 Million.
Generally what Bain did is not what you could call “vulture capitalism.” They didn’t identify weak companies where they could go in and pick the bones. Rather, they identified good ideas, good possibilities, that with enough capital and good business practices (often including laying off excess employees, particularly middle management), they hoped to turn the company around and build success.
Venture capitalists in general can expect a fairly low success rate—about like baseball hitters, who are best in the league when they average hits a third of the time. Bain was a great hitter. A surprisingly low percentage went bankrupt. And of those that did fail, that was often long after Bain was no longer involved. And one has to ask in those cases, what are the odds that company would have succeeded without the opportunities Bain offered?  A further look shows that, in some cases (Dade is an example) where companies did go through bankruptcy, they came through the restructuring and became more valuable, being bought on the other side at even greater profit.
It could be said, generally, that if Bain hadn’t gotten involved in those companies, chances were higher that more jobs would have been lost, and possibly all the jobs those companies provided. But an investment by Bain meant a stroke of good fortune.
As for the number of jobs Romney helped bring about? Probably an underestimate. According to the blog, “If one assumes a complete turn-over of employees every 5 years or so, a single company like Staples, which currently employs 90,000 people, has likely given jobs to over a quarter million people since it was founded!” Remember, Romney is careful to say he knows how jobs are created; he doesn’t say, “As president, I will create jobs,” the way liberals talk about it. What has to happen is to create the environment where businesses can create jobs. Get rid of uncertainty, over-taxation, and over-regulation. Romney knows what it takes because he has been involved in the “how” of job creation in an extremely broad array of businesses and industries. This particular blog lists well over 200 companies Bain worked with. Compare to the relatively vast experience Herman Cain, who had built up a couple of large, successful companies in the restaurant industry.
But one pro-Romney blog is not convincing by itself. So, here is former GE CEO Jack Welch, talking about Romney and Bain. In this two-minute clip, Welch says, “In my lifetime, Mitt Romney is the most qualified leader I’ve ever seen run for the presidency of the United States.”
In this National Review piece, two of the CEOs of Bain-helped companies, stand up for Romney:
Jack Smith, founder of Sports Authority, calls the attacks “a terrible slap against a brilliant guy’s record.” Bain was one of the original investors in the sporting-goods store, and Romney served as a director on the company’s board. Smith says he would consult Romney on “anything and everything.” “He provided guidance and direction,” he adds.
“I heard [Newt] Gingrich talking about how they eliminated jobs and the money they grabbed, that’s baloney,” Smith insists.
On Fox News, Stuart Varney talks about private equity and particularly Bain Capital. This clip is about 7 minutes long, but very informative about what Bain actually did, as compared to what Gingrich and others are claiming about it.

In the long run, it may be helpful to be having this discussion now. We can be certain that the Obama liberals will use any anti-capitalist ammunition they can grab hold of. So, having the opportunity to, piece by piece and case by case, debunk the arguments now will undermine those attacks later. So, for this head start we can thank Gingrich and Perry.

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