Does anyone really know how a private equity firm actually works? I do. And it's absolutely clear that self-serving and stupid people like Rick Perry, Sarah Palin, Newt Gingrich and others who are criticizing Mitt Romney for "vulture capitalism" do not. Similar unfounded criticism will likely come from the Democrats this fall.

Just a few points to consider...

• Private equity firms invest not only their own money and personal funds of their partners, but also money provided to them by other investors such as insurance companies, pension funds, and other private investors. Those firms invest with Bain because of the Bain's record of producing above average rates of return on invested capital.

• Private equity firms invest in companies. Once they buy them, they work with the management of the companies to increase profits and thereby the value of the company. They do not either create or invest in the types of exotic financial derivatives that contributed so greatly to the current financial crisis. If anything, like the public, the businesses they own have also suffered as the result of the use of those types of financial products.

• Investments are only made after significant due diligence and financial modeling, often utilizing the services of expert legal and business consultants, and even then only after multiple levels of investment committee study and approval. Any investment made by a private equity firm almost certainly is vetted by many people, probably multiple times.

• Firms like Bain hire extremely smart and experienced people as their partners and professional staff. The firm probably chooses to consider and perform due diligence on only 10% of the investment opportunities presented to it, and then really invest in maybe 10% of those that they choose to study. That means they find only about 1 out of 100 investment opportunities worthy of an investment.

• Private equity firms never…repeat NEVER…invest in a company in which their purpose is liquidation and sale of the company's assets. They often use a technique wherein they break up a company into its parts and sell various divisions to other buyers. Sometimes they may shut down an underperforming division or business if they find there is little chance that business can continue as a going concern. That strategy is known as "the individual parts of a company are worth more than the company as a whole". But a private equity investor never buys a company for the sole purpose of liquidating it.

• Do private equity firms ever purposely shut down divisions or parts of companies they buy, thereby laying off workers? Certainly. But they do that in order to make the parts of the company that remain stronger and more capable of generating and growing proifits, making the company more valuable.

• Do private equity firms ever make bad investment decisions and find it necessary to close and liquidate a company they own, laying off all its employees? Sure that happens. Sometimes that becomes necessary when it becomes apparent that it would be imprudent to continue to invest in a company that has little chance of surviving. When that happens, typically the private equity firm loses its investment. That makes the firm, its investing partners and the banks that have lent them money very unhappy. In fact, if that were to happen too often, the private equity firm would be unable to raise additional investment capital or borrow the necessary parts of it's capitalization from banks, insurnce companies or other lenders.

• How did Bain Capital do as an investment firm? They produced exemplary results. They have an admirable record. When Mitt Romney says that in his tenure as Bain's CEO that over 100,000 new jobs were created within the companies they owned, I would tend to believe it. It's unlikely we'll ever see a complete accounting of employment gains and layoffs over Romney's 25 years as CEO. "Private equity" really is private and their financial results and statistics will likely never be made public.

• While some of the companies Bain invested in failed and had to be closed down and liquidated, Bain had a sufficient number of the companies they purchased perform as "home runs", growing in size, sales, profits and employment to produce above average rates of return on their investments. Bain's average return on investment was very, very attractive and sufficient to have investors provide them with hundreds of millions of new dollars to invest.

What it boils down to is that over a long period of time--the entire time that Mitt Romney served as Bain Capital's chairman--the firm achieved extraordinary rates of return on their investments, bridging various up and down periods in the economy, managing the companies they owned with deftness and skill. When people like Rick Perry, Sarah Palin or Newt Gingrich accuse Bain and Romney of "vulture capitalism", all they are doing is making ludicrous statements demonstrating their own stupidity. When the time comes that the Democrats make similar criticisms, they too can be accused of the same disingenuous stupidity.

There probably is no purer form of capitalism than the private equity business. Those that assert otherwise might claim to be conservatives committed to capitalism, but their statements suggest they don't have a clue what they're talking about.