Mitt Romney: How Private Equity Works

Recently in the news Mitt Romney has been criticized for his tenure at Bain Capital. The common thing you hear is that Romney amassed great wealth by taking companies leveraging them with debt and selling them reaping millions in profits. People should understand how a company like Bain Capital works before making such statements.

Companies like Bain Capital are known as private equity firms. Usually, a company like Bain will look at companies that are under-valued, in trouble, or help companies go from being private to public traded. Identifying under-valued companies and improving them creates shareholder wealth. Texas governor Rick Perry claimed Mitt Romney was a “vulture capitalist”. I would regard vulture capitalist as a compliment personally. In essence, Warren Buffett is a vulture capitalist when he invested in companies he believes a company is undervalued. Private equities companies don’t get paid unless they meet certain benchmarks. Also private equity firms have their own money on the line so they can’t be too foolish with it. The idea of private equity companies is to come and improve the company. Sometimes, this means firing workers. Firing people is not a bad thing considering some of those people probably shouldn’t have even been hired in the first place. Critics of Romney talk about the job layoffs however don’t talk about the success stories like Dominos Pizza, Staples, and Sports Authority. Yes, Mitt Romney had to fire people but I would argue this is a good trait for the future President to have given the large size of government. Businesses can fire people in the short term. However, no company is successful in the long term by continuing to fire people. New employees increase productivity and profits which make the company more valuable.

Critics argue that companies still went bankrupt since Romney “likes to fire people”. There is no guarantee that when a private equity company helps out a troubled company there will be success. In fact, more often than not there are more failures given the fact that private equity companies take on companies with the most problems. It would like looking at two different doctors with different patients. If one doctor always takes on the sickest and most ill patients we would expect the mortality rate to be higher. However, if the other doctor took on average healthy patients the mortality rate should be comparatively lower. Bain did take on companies with major problems however they did create value. From 1984-1994 Bain was involved in 77 deals. During this time Bain made $2.5 billion while only investing $1.1 billion. So Bain was making an annual compounded annual growth rate of 8.55% per year.

In the process, Mitt Romney also made money for himself. Romney himself is estimated to be worth over $200 million. This is impressive given he spent $54 million to run to eventually become governor of Massachusetts. According to an article entitled “Two Mitt Romneys: Wealth Man, Thrifty Habits” Romney for most of his life has lived like a middle class American. He likes flying JetBlue, while at Bain Capital ate brown bag lunches at his desk, and couldn’t justify spending money on a private jet. Also Romney was required to do chores even on Saturdays. In high school he didn’t even have a car even though his father was an executive at American Motors.
Many people want to criticize Mitt Romney and his ties to Bain Capital. However, when you look closer at what he actually did the record it would show that Romney and Bain Capital in the long run created jobs, wealth, and progress. As economist Dr. Walter E. Williams would say “the rich didn’t get rich by being stupid”.