Nice oped by Steve Rattner on the relevance of Bain Capital’s track record to the presidential campaign. The key takeaway is one I’ve consistently stressed as well:
The language in one prospectus seeking Bain Capital investors was clear: “The objective of the Fund is to achieve an annual rate of return on invested capital in excess of the returns generated” by other investments. Any job creation was accidental.
This is not an indictment of Bain in particular or PE in general. But when they invested in companies, if profit maximization for Bain’s investors implied layoffs or shut downs, then that’s what they’d do. And visa versa—if they saw a chance to build up a company and gain market share, they’d go after it. But even then, labor is always a cost in PE calculations, one to be avoided unless profits would otherwise be left on the table.
In that regard, a key linkage here, one not stressed in the oped, is the non-correlation between profitability and job growth. It falls right out of the above discussion, but there are people listening to this debate who may reasonably think, “OK, PE firms maximize profits, not jobs…but don’t jobs follow profits?”
Alas, all too rarely in recent years has higher profitability linked to job growth. Obviously, both are cyclical so they loosely correlate, but the fact is that profit growth was strong in the 2000s when job growth was anemic and in this current expansion, corporate profitability has more than recovered from its swoon in the Great Recession while jobs are only slowly climbing back.
What I find interesting is that the headline PE model is a zero-sum process: the vulture capital comes in, leverages the company to unsustainable levels while pocketing the proceeds, and then lets the company, customers, employees, creditors, etc. fend for thThe $2 billion JPMorgan lost, someone else gained.emselves in the aftermath.
This ties very neatly (but not nicely) with one of the scariest things I ever heard from a Presidential candidate: last week, Mitt Romney commented on the Chase losses with:
In other words, the economy is a zero-sum game. So what kind of President sees the US (or world) economy as one where for every man’s hand is set against the rest? And what does he mean to bring to that country, or that world?
Aren’t employees seen as assets at all anymore?
Exactly: employees are rhetorical assets.
Perry and Gingrich had plenty to say about Romney/Bain, and it resonated with many GOP voters. The Dems have their critic, but the GOP critic is equally strong.
Oops meant critique. Sorry.
I happened to catch a segment of The Last Word on 5/23, on which Dr. Bernstein was a guest. About halfway through the segment, he mentioned that:
(a) 60 – 90% of PE purchases (of companies) are debt-financed, and
(b) every penny of that debt is tax-deductible, because
(c) the government heavily subsidizes PE leveraged buyouts via the tax code.
This leaves me with a question — do PE firms ever receive a ‘tax rebate’ for incurring vast amounts of leverage?
Second question: where did Dr. Bernstein come by the 60 – 90% stat?
FWIW, I personally appreciate the courteousness with which this topic was raised: I don’t view Romney as intentionally evil. I view him as a True Believer in financial capitalism. He appears to believe that using Other People’s Money to saddle companies with debt — and then extract a share of profits which he off shores to the Caymans as his ‘cut’ — is ‘capitalism’, and it certainly does involve creative uses of capital.
I am not being snarky to state that I think Romney personifies the apotheosis of the GOP’s (and Blue Dog Dems) political-economic ideology of the past 20+ years, and I believe the conversation starting to take place about Bain Capital and the role of PE (and finance) in the US economy is a critically important topic for the nation.
If it is true that PE firms can debt-finance 60 – 90% of their purchases — which is actually simply a form of paying yourself a handsome fee to use Other People’s Money (OPE) in order to load a third party down with unmanageable debt — then Americans need to clearly understand that process.
Because it’s my view that this kind of economic parasitism helps explain larger problems in the US economy in recent decades.
I believe that the way in which people make their money matters a great deal, both for their own lives and the health of their communities.
If that 60 – 90% statistic is accurate, that has enormous implications for HOW Romney made his money (even before he off shored so much of it), which is an economic and political issue that needs much more discussion.
Both facts I cited on that segments come from here http://jaredbernsteinblog.com/debt-financing-and-pe-an-unfortunate-marriage/
The debt financing point comes from a piece by Merrill Goozner, a crack journalist who knows this stuff very well (underlying source: http://leeds-faculty.colorado.edu/bhagat/LBO-VC.pdf), and the second–the fact that the tax system subsidizes debt–from a Brookings paper linked in my post.
Interesting point made early in the CO.edu paper — PE leverages *mature* companies, whereas it’s VC that actually engenders more innovation at early stages.
I realize that I tend to conflate the PE and VC, and I’ll bet that I’m not the only one who makes this error. Unfortunately, this error lends PE a ‘policy cache’ that it doesn’t actually deserve; PE is assumed to be far more innovative than its actual role in the economy would justify. (I suppose somewhat like mistaking a mortician for an obstetrician, if I might be so frank.)
This leads to policy and public opinion muddles.
I really feel like the End of Fordism is a good way to understand a lot of the current vulture capitalism.