SILENT PARTNER

02.21.12

Bain Capital Stays Quiet Amid Attacks on Mitt Romney, Private Equity

Mitt Romney’s old firm won’t talk to the media, even to give its side of the job-creation debate. Its silence speaks volumes about private equity.

You’d figure Mitt Romney’s old colleagues at Bain Capital would be banging down the doors of media outlets demanding equal time. After all, even those paying only cursory attention to the Republican primaries must look at Bain as a firm whose hallways are thick with Gordon Gekko types who shutter factories for the sport of it. They’re vultures, they’re sharks, they’re job-destroying barbarians—a perfect stand-in for everything wrong with cutthroat capitalism.

Yet my two-week odyssey to secure an interview with someone, anyone, at Bain for its side of the story ended with a statement of the obvious by a spokeswoman named Charlyn Lusk. “Bain Capital isn’t really talking to anybody,” Lusk said. 

One industry insider explains the mystery of why Bain refuses to talk to the press this way: “They’re in a real precarious situation. They need to protect themselves, but one wrong answer and it’s big news around the country.” More than a decade has passed since Romney worked at Bain, the firm he founded in 1984, but one ill-advised comment “and inadvertently they’re hurting their founder’s chances of becoming president.”

Another theory, of course: telling the truth might be worse than saying nothing at all. Says William Cohan, a former investment banker who for the better part of 17 years sold distressed companies and poorly performing divisions to the likes of Bain and other big buyout firms: “Private equity is nothing more than incredibly brilliant financial engineering. You put up as little money as you can, you load up a company with debt, maybe it works, maybe it doesn’t, but either way you’re growing rich as Croesus.” The shark could talk but, really, what could it say other than it gets hungry?

***

My efforts to talk with Bain began at the end of last month, shortly after Newt Gingrich said Romney should “give back all the money he’s earned from bankrupting companies and laying off employees over his years at Bain.” The typical corporate site lists the names of a small battalion of PR people, phone numbers and emails included. The more publicity-shy force you to search a little—maybe there’s a name and number at the top of a press release. At the Bain site, the best you can find is a generic email for “mediaPR.” So I sent in my request and, meanwhile, while waiting to see if an actual human would get back to me, I called the private-equity industry’s trade group. There, I spoke to Ken Spain, communications director of the Private Equity Growth Capital Council.

Spain felt Bain’s pain—but only off the record. Back in 2007 Bain had been one of a half-dozen or so buyout firms throwing money into the pot to create a group that lobbies for its interests on Capitol Hill. The annual dues were nearly $1 million a year for a firm of Bain’s size and the firm decided to drop out in 2011, a decision not without its ironies. Unlike so many of its free-spending peers, Bain had always been tight-fisted, reflecting the thrift of its now-high-profile founder. Yet here at the start of 2012, with Bain in desperate need of defenders due to that very founder’s presidential ambitions, this trade group it helped to create is of only minimal help because of the lingering culture he established.

The private-equity council describes itself as an “advocacy, communications and research organization, and resource center.” A tax-lobbying group would be more like it. Through its first five years, the group devoted most of its energies to preserving the “carried interest” loophole that allows the mavens of private equity to pay a tax rate of 15 percent on most of the money they earn, rather than the 35 percent they would need to fork over if their annual haul were taxed as regular income. It was a fear that mounting protests in Europe would spread to the U.S. that had spurred the big buyout firms to first establish the private-equity council. Yet as luck would have it, the group opened its Washington office just weeks before the first serious push to persuade Congress to tax private-equity profits like ordinary income. Those advocating for a change came within a few votes of winning, but the fight came to an abrupt end at the start of 2011, when the Republicans took control of the House. More recently, of course, the trade group’s preoccupation has been the reputation of an industry already taking a beating even before Romney had secured the nomination.

Private equity has been here before, back in the late ’80s, when popular works such as Wall Street and Barbarians at the Gate exposed the industry’s darker, more destructive side. Bain Capital and its ilk were called leveraged buyout firms back then, but whatever the rubric, the business is the same. Bain Capital and its competitors typically buy businesses that are in need of a big infusion of cash or enterprises that are struggling, despite their potential. They tend to use relatively little of their own money and borrow the rest. To understand the leverage part of the leveraged buyout business, consider the (pre-bubble) speculator who put down $100,000 of his own money on a $500,000 home and took a mortgage out on the rest. A few years later, that home is worth $1 million—and he’s made $500,000 on that $100,000 investment. Add a few zeroes to those numbers and that’s private equity. Except it’s remarkable how often buyout firms, by siphoning off profits along the way, can earn huge profits even on companies that go bust.

* * *

A few days after sending my email to Bain, I heard from Charlyn Lusk, who works for an outside PR agency kept on retainer to take care of such inquiries. My request seemed straightforward—Bain was getting pounded in the media, and we’d like to give the firm an opportunity in the pages of Newsweek to give its side of things —but a battery of questions followed. Would I get into the 15 percent carried-interest issue? (I might mention it but that would hardly be the focus of the piece.) Who else would I be talking with for the article? (Others in private equity and academics, but mainly we want to hear from Bain.) How much would I reprise the attacks by Romney’s rivals in the GOP primary? (Enough to frame the story, but it’s not like I’ll be calling the Gingrich campaign.) Not all that unusual for a business reporter these days, except this particular adventure would prove to be more Raiders of the Lost Ark, where getting past the giant boulders and hidden spears early in the quest only meant confronting the next obstacle. 

I asked him why Bain might be resistant to talk given the pasting the firm is taking in the media and he responded, “We’re not running for president.”

“Your request has been acknowledged by Bain Capital,” Lusk wrote in a follow-up email a few days later. “The first step in the process is a conversation with Alex Stanton, Bain Capital's PR representative, to get a better sense of what you’re writing and provide context and background. After that, a determination will be made on next steps.” I didn’t know what more I could tell them, but I said sure.

If Lusk was PR pleasant, Stanton’s style was brusque and sharp. He, too, asked me how much I’d be getting into what he called this “carried-interest junk” (second question), and asked me if I would be “doing a rewind on the old political crap, most of which has been discredited.” I mentioned some things I had written in the past and he made clear that I needn’t have bothered: he had done research on me. I asked him why Bain might be resistant to talk given the pasting the firm was taking in the media and he responded, “We’re not running for president.” After around 15 minutes, Stanton said, “We may decide to put our point of view out there. We may. But we want to find the right home for their story and this sounds more like a piece questioning the whole industry.” I was encouraged, though, when he stayed on the phone another half hour to talk on background and also closed by saying, “probably someone will call you.”

I don’t think it would be a betrayal of the background portion of our talk to say Stanton pointed me to studies by several academics suggesting that buyout firms are not the job destroyers they have been made out to be. Private equity–owned businesses slash jobs at a higher rate than publicly traded companies, according to a 2008 study by a trio of well-regarded professors, but they also grow more jobs; in the end, there was no appreciable difference between publicly traded companies and private equity–owned firms in terms of job creation. While that study can be offered as a defense of Bain and any other big private-equity firm, it hardly helps the Romney campaign make its case. “We helped create over 100,000 new jobs,” Romney has boasted on the campaign trail. But this study suggests that the best he can say is that he’s not the “vulture” capitalist Rick Perry said he was during one of the debates.  

“If you ask me does private equity provide value, I think the answer is yes,” says Steven Davidoff, a former Wall Street attorney who now teaches law at Ohio State. “But while that might be true from an economic theory standpoint, that’s a complicated argument to put forward. That might be why private equity is reluctant to talk,” says Davidoff, who wrote the book Gods at War: Shotgun Takeovers, Government by Deal and the Private Equity Implosion. “Every multinational at one point or another has laid people off.  That’s what happens in corporate America. But saying that would be little solace to people losing their jobs.”  

* * *

Mitt Romney didn’t invent the leveraged-buyout business. The industry traces its roots back to the 1960s, says William Cohan, who has written well-regarded books about Goldman Sachs and also his former firm, the storied investment bank Lazard Frères & Co. (Cohan also worked at JP Morgan.) During the second half of the 1970s, pioneers like KKR (Kohlberg Kravis Roberts) and Forstmann Little made astonishing profits as they perfected the LBO model, and the gold rush began. Romney began Bain Capital in 1984 after William W. Bain Jr., founder of Bain & Co., one of the country’s top management consulting houses, asked this 36-year-old wunderkind under his charge to get the firm into the business. We’re not quick flip artists like these other firms, this newcomer to the buyout field would claim, because being from Bain, we have the experience to help turn your company around. But then that’s also what pretty much every buyout firm whispers in the ear of a would-be seller.

“As far as I’m concerned, Mitt was part of the lucky sperm club,” Cohan says. “He was in the right place at the right time.”  Cohan seemed particularly indignant over Romney’s 100,000-job boast. “The only jobs Mitt Romney created were for the 30 or 40 people he hired from the Harvard Business School when he was running Bain,” he says. “The CEOs of the companies he invested in might have created something like 100,000 jobs. But not Mitt.”

Cohan’s unsolicited advice for Romney is to stop talking about the jobs he supposedly created and instead stress how private equity benefits more than the super-rich. Like many buyout firms, Bain Capital mainly invests other people’s money, including money entrusted to them by university endowments, charitable foundations, and pension funds. The Bain partners are certainly getting rich – they take a huge cut of the profit before sharing it with its investors (the typical private-equity firm takes a 20 percent skim off the top, but Bain’s performance has been so good they can demand and get 30 percent) on top of the steep annual fees they charge investors to manage their money—but others are enjoying the fruits of their labors as well. According to the Private Equity Growth Capital Council, pensions, endowments, and foundations accounted for 63 percent of the money invested in the industry in 2010.

Cohan has no love for Bain or Romney. During his years as a Wall Street dealmaker selling businesses to various buyout firms, Cohan came to so distrust Bain that after a time he stopped doing business with them altogether. He came to see Bain under Romney’s direction as a bait-and-switch negotiator that, time after time, would put an enticing offer on the table, only to slash that offer once they had removed the competition. That was an assessment shared by others he knew on Wall Street, Cohan says—though apparently not everyone sees Bain that way. Paul S. Levy, cofounder of JLL Partners, a midsize private-equity firm, said of Bain in an interview with New York Times columnist Andrew Sorkin. “They are viewed as very good people, honest people. It’s sort of like everyone’s picking on the wrong guy.”

It’s not like Bain is the only big buyout firm keeping a low profile as they watch one of their own run for president. Sorkin ended up devoting an entire column to Levy mainly because he proved willing to talk. “Virtually none of the big names in private equity have spoken up to defend the industry,” Sorkin wrote in mid-January. “Over the past several weeks, any time my colleagues or I have sought comment about attacks on the industry, private equity’s kingpins have declined.”

Occasionally, you’ll see a Bain spokesperson quoted in the press.  One spoke long enough to a reporter from The Wall Street Journal to dismiss as “inaccurate and misleading” a study the newspaper published last month of 77 of the businesses Bain invested in under Romney’s 15 years as CEO. The Journal found that 22 percent of those firms either shuttered its doors or filed for bankruptcy within eight years of Bain’s investment. That’s no surprise to Steven Davidoff, the former Wall Street attorney turned law-school professor. “Private equity routinely burdens companies with debt, which puts them at more risk of going bankrupt,” Davidoff says. “I don’t think there’s any doubt about that.”  

The New York Times’s Michael Barbaro wrote perhaps the most revealing profile of Romney-led Bain when he delved into the buyout firm’s purchase of a medical device maker named Dade International. Dade was a huge hit for Bain and its investors. The firm booked $242 million in profits on a $30 million investment in Dade—eight times its investment in just five years. The firm also paid itself $100 million in fees, Barbaro reported, for putting together the deal and for helping to run the company.

Yet Bain proved a nightmare for the company’s workforce or anyone who actually cared about its long-term prospects. Sales soared under Bain’s leadership, but Dade, now operating under crushing debt, laid off more than 1,000 workers in only a few years’ time. So as to pocket some profits for itself and other investors, including Goldman Sachs, the company refinanced, taking on even more debt and spurring hundreds more layoffs. Dade’s executives were among those who profited in this refinancing deal, but at least one, former company president Robert Brightfelt, told Barbaro that the payday they all enjoyed was ill-conceived. “You would have to say, looking back, that it was too large because it pushed us into bankruptcy,” Brightfelt says. Bain declined comment for the Times story, except to say the company was proud of its track record through good times and bad. 

***

I had gotten through the first couple of lines of defense but no further. My mistake, in retrospect, was raising Dade. Over the phone, Alex Stanton offered to set me up with the right people should I have any specific areas of interest. Dade seemed to capture the most controversial aspect of the buyout business: private equity succeeding even when a company fails. Jon Stewart and Stephen Colbert have both made reference to Dade. For many, the deal shaped what they thought of Bain. But of course Dade meant talking about layoffs and profits in the hundreds of millions of dollars on a company that went bankrupt.  

“Based on what I've heard so far, I am having a hard time seeing my way clear to this being a fair and balanced piece,” Stanton wrote to me a few days later.  “Let’s discuss.” I’m not sure what I was supposed to say beyond repeating that the whole point of the piece was to give Bain its say, but I gave it a shot. Maybe the most insidious part is that Bain never said no. “We’ll get back to you,” I was told, which was the last I heard from any representative of the company.