Blistering attacks by rivals on Republican presidential front-runner Mitt Romney over his private equity career make for weird political theater. Who'd imagine that professed champions of free-market capitalism, in whose eyes President Obama is a socialist, would denounce Romney for taking the profit impulse too far. Newt Gingrich, who fed at PE's trough as a former board member of buyout firm Forstmann Little & Co., accused Bain Capital LLC and Romney of "looting" companies and sacking employees. Taking aim at PE as a whole, Texas Gov. Rick Perry dredged up the stereotype of buyout artists as "vultures" who "eat" companies' assets and leave behind a "skeleton." Subtle or illuminating the critiques are not.
The national press, meanwhile, has contributed more clarity than Romney's rivals to the debate, which will intensify if Romney, Bain's CEO from 1984 to 1999, is nominated. Not just Romney and Bain, but PE itself and its role as a nurturing or nefarious force will be on trial. Recent stories in The New York Times and The Wall Street Journal probe elements of Romney's PE tenure, which yielded sky-high investment returns but also human collateral damage. As the press is wont to do, the pieces zoom in on a few bum deals, not Bain's many successes. They take aim at two hot-button issues: Did Bain build or destroy jobs? Did Bain strengthen or weaken its companies?
There's some damning material, though overall the picture is mixed. The stories suffer by being blinkered: By examining Bain's modus operandi in isolation from the wider corporate world, they leave the impression that private equity is an aberrant strain of U.S. capitalism. That's hardly the case.
Take jobs. It's a key question the Times touches on in a nuanced tale of improved profits and workers' woe at Dade International, a medical business Bain owned for eight years starting in 1994. In the course of expanding operations and bolstering Dade's cash flows, Bain bought and folded other businesses into it that created worker redundancies that Bain thinned. About 1,700 workers in the U.S. lost their jobs, while Dade's overseas workforce grew.
What the Times doesn't say is that piggy-backing production lines and firing workers after mergers is standard practice in corporate America, as is outsourcing overseas. Many mergers are driven by the promise of boosting per-worker productivity through layoffs. Businesses are constantly creating and eliminating jobs. Academic studies show that by corporate standards, the net impact of firings and hirings has produced only slightly more job reduction among LBO'd companies. In general, PE-backed companies do more firing, but also more hiring than non-PE-owned businesses.
The Journal addresses the second question: whether Bain under Romney made its companies healthier or hurt them. The piece pivots on the failure rate among 77 businesses Bain invested in from 1984 until early 1999. By PE standards, Bain's bankruptcies were unusually high: 22% filed for bankruptcy or shuttered by the end of the eighth year after Bain took over, often with sizable job losses. Of the 10 businesses in which Bain scored its heftiest gains, four later went belly-up. In several companies, including Dade, debt Bain piled on to award itself a fat payout was more than they could bear. Bankruptcy ensued.
The story's optics are ugly, but the Journal's account is also incomplete. Some failures occurred years after Bain exited, and the piece doesn't explore Bain's role in any depth. As objective ballast, it does propose a credible reason for Bain's high bust rate: In contrast to most PE firms, Romney's Bain trafficked in high-risk turnarounds. Dade was near failure when Bain appeared. Firms specializing in turnarounds naturally experience more failures than those that buy safe, solid targets.
Romney's record in PE is mixed. A small number of debt-funded payouts that led to layoffs and bankruptcy are a blot, and Romney says he regrets them.
More often than not Bain's companies thrived financially, and employment often grew. Far from occupying the economy's deviant and rapacious fringe, Romney was a creature of U.S.-style regenerative capitalism, imposing needed discipline on ailing and poorly managed outfits with bloated cost structures. "Creative destruction," Joseph Schumpeter's famous oxymoron, encapsulated his and Bain's approach to buyouts.
For Romney to get the electorate to understand that thinking, let alone embrace it, is likely impossible. His rivals won't make the task any easier.