Are Private Equity and Venture Capital Good or Bad for the Economy?
The biggest issue following Republican presidential candidate Mitt Romney around each primary state is his wealth. His GOP rivals have consistently questioned how much he is worth, how he made his money, and where he keeps that money. Because of Romney's successful career in private equity as the head of Bain Capital, this election has raised the question: Are private equity and venture capital firms bad for the economy? Not necessarily.
Mitt Romney started Bain Capital in 1984, and since then it has grown into one of the most successful private equity firms in the world with over $60 billion in assets according to its website. In the process, Romney became extremely rich, and now he is one of the wealthiest presidential candidates in history with an estimated wealth between $190-250 million. In case you’re curious, our richest president was George Washington, who had an estimated wealth of $525 million adjusted for inflation.
One of the investment strategies of Bain Capital is to turn failing companies around. This means to take them private if they are public, to buy them if they are spun off of another larger company, or to simply acquire them in a straight cash purchase from the previous equity holder(s). Usually, this results in mass layoffs, cost-cutting measures, and process improvements that turn around the company’s finances and make them attractive for investment again. Bain then usually sells these companies at a profit.
Of all the companies talked about during the primaries that Bain was involved in, KB Toys is the one that seems to keep coming back to haunt Romney, but Bain actually acquired KB Toys in 2000, almost a year after Romney left the firm to work for the Salt Lake City Olympic committee. Though Bain’s efforts in trying to turn KB Toys around were not successful, as the company failed in 2008 during the recession, Romney and Bain are now accused of making “disgusting” profits. This was a primary critique of the Newt Gingrich allied Super PAC “Winning Our Future” in its epic work of fiction titled “King of Bain.”
According to the Washington Post, that is an outright lie. The article also points out that a host of other charges against Romney are false, including the alleged failure of Unimac, which actually still exists; Bain’s involvement in the bankruptcy of DDi, which is now thriving; and the demise of Ampad, which still exists. At one point, Gingrich's Super PAC even claims that Romney caused “tens of thousands” of people to lose their jobs at Ampad, which simply isn’t true. Most of these companies went through hard times, but are now doing much better as a result of the efficiencies and other improvements made by Bain and others.
Romney also claims to have created over 100,000 jobs as a result of Bain’s investments. The bulk of them coming from the 90,000 people employed by Staples, of which Romney says, “That's a business that we helped start from the ground up.” In addition, according to the Washington Post, Bain invested in the Sports Authority (15,000 employees), Bright Horizons Children’s Centers (15,000 employees), and Domino’s (7,900 employees). So while there is a tangible amount of people employed over 100,000, the amount of people who lost their jobs isn’t being taken into account.
While it is easy to see private equity and venture capital as corporate raiding, I see it as natural selection. Some companies become too big for their own good, others just need an injection of capital to get the ball rolling. The only way either will happen is if there is an outside force to come in and right the ship, at a profit of course.
While we may never know exactly how many jobs were gained or lost as a result of Bain Capital’s activities, one thing is certain: They made Mitt Romney a very wealthy man. In the process, companies like Staples, the largest office supply company in the country, came into their own because of the startup capital provided by Bain.
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