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.

VK, You have done an excellent job of explaining venture capitalism. It's focus is on the creation of value not destruction. People have confused crooks and con men such as Bernie Madoff with venture capitalists. This has been promoted by our 'sound bite' news coverage and movies such as 'Barbarians at the Gate'.

Perry, Gingrich, Palin etc. have deliberately confused the issue for their own benefit. This is not only disingenuous but damaging to this nation and its future economic success.

Well done.

The companies like Bain bring in people who will do what ever it takes to make a good business out of problem or distressed businesses.

They do what previous management/ownership either would not do, or could not do or were simply incapable of doing, hence the reason for the problem/distress.

The process is exactly why/how Jack Welch earned the name 'neutron jack'.

btk

Originally Posted by billethkid

...The process is exactly why/how Jack Welch earned the name 'neutron Jack'...

Exactly right, Billie.

By the way, has Rick Perry completely forgotten that he was in exactly the same "investment business" that he now criticizes Mitt Romney for? Perry created two state-sponsored investment funds, the Texas Enterprise Fund and the Texas Emerging Technologies Fund. His record in using those pools of money--money which came from the taxpayers of Texas--was considerably less skillful and had much worse results than Bain Capital. Perry even oversaw one of Texas' larger investments from these funds, a large investment in Countrywide Financial, the mortgage company that went bust and had to be liquidated and sold to Bank of America, losing the complete investment of taxpayer money.

Now he's criticizing Romney for vulture capitalism? Here, read this...

http://www.washingtonpost.com/blogs/...kViL_blog.html

Why doesn't someone ask Perry why, as the kettle, he has any right to call Romney's pot black?

Thank you VK,

I knew generally what they did and how the did it but this fills in some blanks.

Frankly I am about sick of the "Vulture Politics" going on right now. It is like the GOP candidates work for the Obama campaign!
EB

yes, i think newt gingrich regrets taking this tack and it may have been a fatal error. up to then he had a clean and positive message...since then i think rick santorum has only gained momentum among conservatives...we respect romney and will support him if he is the candidate, but we are still hoping to have a true conservative in the white house...thanks kahuna for a very good economics treatise.

Nicely done VK.

Thank you for explaining "There probably is no purer form of capitalism than the private equity business."

Very nice post VK. Where are all the liberals opinion? Not one negative post.

I had an inkling but got quite an education in various articles published recently in WSJ and then by surfing the net. While their only motive is profit and not an ounce of altruism, in the long run these firms are a benefit to our economy.

However I can understand why some people refer to equity firms as vultures. Because in essence they do serve in a number of cases in the same manner as vultures in the wild. Clearly some of these equity firms operate solely to buy companies at a bargain just to sell off the assets, etc and make a quick profit much the way people flip houses in the residential market.

Further, you would be inclined to view it that way had you been one of those caught up in one of these eating machine. Captialism, like stocks bonds and commodities need winners and losers. You love it if you win and not so much if you lose.

Then you add into this mix the business mannerism/philosophy of a private equity firm and you may leave some folks hating you more.

So I can see but perhaps may not agree why some folks would cast a shadow over Bain Capital.

I am pleased this issue is out there now. I hope for the Republican sake romney can address this issue with honesty and clarity and positivity.

Originally Posted by schotzyb

Very nice post VK. Where are all the liberals opinion? Not one negative post.

This is way over most voter's heads, but most voters know somebody who lost their job because the company was bought out or jobs were shipped overseas. Governor Romney is the .001% and President Obama is fighting for the 99%.

janmcn,

Governor Romney is the .001% and President Obama is fighting for the 99%.

Really, Is that why Pres. Obama takes advantage of every opportunity to tell use how rich he is and how he should pay more taxes? I don't want to hear how rich he is, I guess it is important to him.
It looks like being Pres. has been pretty good for his bottom line.
So how is Obama fighting for the 99%? By making energy prices skyrocket? By creating Soooooooo....many jobs?
By getting them health care, sometime down the road? And do 99% of us need Obama care?

Really? I think that you are still wearing your hope and change t-shirt.

Weak, I think!

Originally Posted by notlongnow

janmcn,




Really, Is that why Pres. Obama takes advantage of every opportunity to tell use how rich he is and how he should pay more taxes? I don't want to hear how rich he is, I guess it is important to him.
It looks like being Pres. has been pretty good for his bottom line.
So how is Obama fighting for the 99%? By making energy prices skyrocket? By creating Soooooooo....many jobs?
By getting them health care, sometime down the road? And do 99% of us need Obama care?

Really? I think that you are still wearing your hope and change t-shirt.

Weak, I think!

If you check the facts you'll find that most of President Obama's "wealth" comes from books he wrote before he became president in addition to his $400,000 annual income as president.

President Obama is fighting for the 99% by lowering taxes, saving the auto industry, having a jobs bill (that the republicans will not pass), passing financial reform, trying to save medicare, medicaid, and social security, passing the Affordable Care Act, and creating the Consumer Protection Agency.

If you check, you'll find that President Obama releases his tax return every year. When is Governor Romney going to release his tax return? After he returns all his off-shore money? I'm guessing we'll eventually find out that Romney pays very little tax on a great deal of money.

then we would see him as just another who has enough money to have consultations of how to skate on the thin ice of legal or not. Nothing different than Jeff Imelt, CEO of General Electric has all the resources of a mega billion dollar company whose recommendations result in GE paying no taxes in 2010.

Jeff Imelt who is chairman of the business mes coucil for "JOBS" who reports to Obama.

The same Imelt who transferred a large chunk of medical systems from the USA to China this past year.

So please do not single a wealthy person like Romney who has the resources to take advantage of the laws and opportunities for personal exploitation at the cost to the tax payers. Just like each and every other wealthy person in Washington DC.

I am not advocating it is OK or acceptable. Merely pointing out that Romney is not an isolated case.

So let's do away with the distractions and the red herrings and focus on who can do the job.

btk

I am sure that he has not made anything extra being president. Not.
What I am saying is that he can't stop talking about how rich he is. Kinda sounds like Trump sometimes!
As far as the Affordable Care Act, Do you really think that government can make something MORE affordable, Wow!

Tax cuts, Do you mean extending THE BUSH TAX CUTS?

How is he saving medicare, medicaid, and social security?
What has he done? What has either side done?

As far as the Consumer Protection Agency, do we really need or can we afford another agency?

I didn't say anything about tax returns but if you are implying that he or his administration is more transparent than other presidents or presidential hopefuls, BS!
If Romney is taking advantage of legal tax loop holes then what is the problem? Is he breaking the law?

I guess we see it very different.