THE STUMP JANUARY 10, 2012
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Speaking of the free passes Romney may be getting—and, for that matter, of financial engineering—there’s another slightly-dodgy Romney formulation that hasn’t gotten much pushback so far: the distinction between “venture capital” and “private equity.” Venture capitalists typically provide money to very young firms to help them get off the ground in exchange for an ownership stake. Private equity firms typically provide money to more established firms, often those that have run into problems, also in exchange for an ownership stake. In many cases, private equity firms engage in leveraged buyouts, which means they issue a lot of debt to take control of a company that they typically reorganize and eventually sell off again.
For the purposes of the political debate, the key difference is that venture capitalists provide money so firms can add jobs and invest in equipment, while private equity shops provide money to tide a firm over while bringing costs in line with revenues, often by cutting jobs. Both are legitimate activities if done responsibly. But, obviously it’s going to be a lot easier to run for office if you were in the business of adding jobs rather than cutting them.
And so, not surprisingly, Romney often talks about his days at Bain as though he were exclusively in the venture capital business there. His favorite anecdote from his previous life is helping to start Staples, which is a classic VC tale. But, of course, Bain was also heavily into the leveraged buyout business. The question is whether Bain was sufficiently engaged in venture capital that Romney is justified in using it as a short-hand for his time there, and the answer is almost certainly not. As this detailed Wall Street Journal piece reported yesterday:
For its analysis, the Journal used a list of 77 Bain investments inked from 1984 through 1998 that were included in a document that a unit of Deutsche Bank AG circulated in 2000, while soliciting participants in a fund to invest with Bain. The document—which cites Bain as a source—appears to be the most authoritative available for Bain's activities, and says that the deals accounted for about 90% of the money Bain invested during that period. The Journal obtained updated information from a similar 2004 prospectus.
The list focused on larger "private equity" investments—typically deals in which Bain took control of a business, or in some cases worked with another buyout firm to do so, aiming to improve the target business's performance. Deutsche Bank lumped into a single line all of Bain's investments of less than $2 million and those that were more of a venture-capital nature, which generally involved buying minority stakes in promising small companies such as Staples.
Seventeen of the 77 private-equity targets filed bankruptcy petitions, usually Chapter 11 reorganization, or closed their doors by the end of the eighth year after Bain's investment.
In their own stories, reporters tend to use the term “private equity” much more often than “venture capital.” And, of course, rivals tend to implicitly focus on the former. But I haven’t seen either group really push Romney on how he at best fudges the distinction between the terms. Listening to him, you'd think venture capital and private equity were simply two ways of describing the same line of work, when in fact they're widely regarded as distinct pursuits. Along with his humble beginnings and his fear of getting pink slipped, it’s another piece of the Romney narrative that doesn’t entirely hold up.
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8 comments
What, Noam, you think the average political reporter knows the difference between private equity and venture capital? Ha-ha-ha. You're right to take Romney to task for this little bit of juggling with distinct financial terms, so I suggest you make like Greg Sargent and keep plugging away on this until larger publications start to understand, pay attention and point this out in their reporting of Romney's business activities.
- wildboy
January 10, 2012 at 12:44pm
I think what you want to distinguish is a hedge fund, which acquires private companies with a combination of equity (a little) and debt (a lot), the equity put up by sophisticated investors, with the managers of the hedge fund (Romney and the other partners at Bain) taking an interest in profits in return for little if any equity. A hedge fund is what eventually produced such outsized profits for Romney and the other partners at Bain. Think about the math. If Romney and the other partners at Bain put up little or no equity, then their return is almost infinite. Go to the Dealbook on the Business page of the NYT web site and you will see three separate categories: private equity, hedge funds, and venture capital. Private equity is the conservative end of the investment business; it's what your father did. Not so much risk, but not so much reward either. Hedge fund is the other end of the investment business. Lots of risk (all that debt) but also enormous rewards (as long as the acquired business doesn't drown from all that debt). Bain 's hedge funds produced enormous profits for Romney and the other partners, but some of the businesses eventually drowned in all the debt (after, of course, Romney and the others had pocketed their profits).
- rayward
January 10, 2012 at 1:33pm
what we're really talking about is leveraged buyouts, which i think are normally associated with private equity funds (since they involve an ownership stake) rather than hedge funds (which often engage in stock-picking and the trading of other financial instruments, not taking equity stakes per se). but i agree that these lines get blurred.
- Noam Scheiber
January 10, 2012 at 1:49pm
See the investopedia entry, for example: http://www.investopedia.com/terms/p/privateequity.asp#axzz1j5DEiV4c
- Noam Scheiber
January 10, 2012 at 1:55pm
"involved buying minority stakes in promising small companies such as Staples." Wait, are you saying that all of those jobs created at Staples were the result of Bain Capital's minority stake and that of other stakeholders as well? It sounds like the number of jobs attributable to Gov. Romney needs to be prorated by Bain's fraction (at least.)
- aduncanson
January 10, 2012 at 2:13pm
aduncanson, what galls me about Romney is how he is taking credit far beyond what he deserves. If he had invested in Bell Telephone when it first came about he would have acted as though all the jobs created were as a result of his actions when we can all easily realize that those that were lucky enough to get in on the ground floor get the rewards but don't deserve the credit, Bell did.
- blackton
January 10, 2012 at 2:43pm
Noam, I work in a company providing vital national infrastructure and we suffered from that Private Equity Leveraged Buyout scam. We're now in billions of debt after the leveraged buyers walked but not before pulling tens of millions out in "management fees". There's nothing responsible about this stuff and it should be banned, period. These buy outs load companies with debt, sweat the assets (fire people) and extract fees. That's it. There is no creative destruction here, no positives, at all and there record is dreadful http://www.zerohedge.com/article/disastrous-performance-private-equity-top-10-lbos-6-are-distress-4-have-defaulted
- IggyPop
January 10, 2012 at 3:35pm
Noam, I'm noticing a pattern in that you like to understate your conclusions. Previously, Newt's glowing neon sign, and this seems a little less "slightly dodgy formulation" and a little more "flagrant half-truths" to me.
- GSpinks
January 10, 2012 at 4:36pm