By Alexander P. Cole
January 16th, 2011
Los Angeles, CA
Determining Mitt Romney’s Presidential suitability solely based on Bain Capital is naïve, at best.
Over the past month, there has been a deluge of critics, including other Presidential hopefuls, taking issue with Romney’s ability to serve as US President based on his business background. The primary attacks on Mr. Romney include his moral compass with respect to business and the issue of job creation…to which I reply – how on earth are those relevant?
This begs the simple question of whether people actually understand what private equity is and how it works. To start with, let’s dispel what seems to be a recently created urban myth – private equity is NOT about job creation. It is about making money for the firm and the firm’s investors who are known as limited partners.
In the simplest terms, private equity is capital used to invest in private businesses. If private equity is used to invest in a start-up or early stage company, it is known as venture capital. This is a very risky approach, for certain, as the majority of start-up’s do ultimately fail. They can, however, be exceptionally financially rewarding if the underlying company becomes a success. Example – Peter Thiel’s $500,000 investment in Facebook in the summer of 2004 for a 10% stake in the company. While there has been an inordinate amount of debate regarding Facebook’s valuation (in late 2011, the company announced that it is targeting an initial public offering at a $100 billion valuation – double what it was valued at last January), I think that it’s safe to say that Thiel’s investment was indeed wise.
Private equity can also be used to facilitate a company’s management to purchase the company from its owner, a “management buy-out”. If debt is utilized to facilitate the transaction, it is known as a “leveraged buy-out”. But the bottom line is private equity firms, such as Bain Capital, are in the business of creating additional value for existing businesses so that they may ultimately sell the company at an increased valuation, sell the company’s assets, etc. In order to create additional value, frequently cost efficiencies are pursued, consolidation occurs, divisions are closed, workers are terminated and unions get angry. But this doesn’t make private equity firms “bad”. They create value through increased efficiency. In many cases these measures enable companies to flourish, expand and both hire more workers and create value for stakeholders. So you can take that moral compass argument and throw it out the window.
With respect to the issue of job creation and much to Newt Gingrich’s delight, Romney did himself a huge disservice by telling the media that he had “created 100,000 jobs”. It led him into a trap whereby he has to repeatedly justify that figure. Moreover, that’s not the point. The point is that Romney’s experience at Bain both proves how adept he is as a businessman (a highly attractive quality in this period of economic malaise) and underscores both his intelligence and how dynamic he can be. Private equity firms are most definitely not in the business of job creation. Job creation may well be an ancillary benefit of the firm’s activities, but it is not their concern.
Judging Romney’s Presidential suitability based solely on his tenure in the private sector is ridiculous. One can infer certain points (salient or not) from an analysis of his overall success during this period, but it is certainly not an all-encompassing approach. If one wants to judge his “moral compass”, take a look at his values, his family, or his religion. And if you’re angry that private equity firms currently fail to operate as staffing services, you’ve got a long wait ahead of you.
