Mitt Romney
My company receives two or three canned calls a month from private equity (PE) firms, like Mitt Romney’s Bain Capital, prospecting for a deal. There are far more buyers of established companies than sellers.
All of us on the receiving end of these calls know the PEs are not so much about running companies as they are about buying and selling companies and making a big buck in the process.
There are a couple of ironies in this never-ending process. First, I did a leveraged buy-out when I bought Serigraph in 1987, so can be included in the debate over leveraged buy-outs. The founding family of Serigraph needed to sell, and I wanted to operate a company. Because of a previous career as an under-paid, ink-stained wretch, a journalist, I needed to find investors and borrow a lot of money. With some luck on timing, the leveraged deal got done and has worked pretty well for all parties.
The difference, though, is that I wanted to continue to build the company for success in the long term. PE’s differ in their objectives, but most buy-out firms want to “flip” or exit their investment in five to seven years. They never fall in love with their portfolio companies. The purchased firms are inanimate objects.
The second irony is that the owners of Serigraph have no plan for selling the company, yet the robo-like PE calls and pro forma letters keep coming. We have a large circular file and an active delete button.
Third, whatever happens in the PE world has little to do with job creation. It is pretty much accepted in economic development circles that established, mature companies do not collectively create jobs. Indeed, on balance, they eliminate about one million jobs a year in the United States. It doesn’t make any difference if the owner is the public, a private party or a PE.
It is the entrepreneurs and their young companies that account for all the net job creation in America. Therefore, it is extremely important to make the distinction between venture capital firms and buy-out firms. They are not the same.
Private equity firms are just as likely to reduce jobs as their mature companies through right-sizing, streamlining, consolidation, or mergers as they are to add jobs by growing sales. Generally, they have sharp pencils and business minds, but usually don’t know much about the organics of the particular businesses they buy. Because they make a lot of money by shrewd use of OPM (other people’s money), they tend to be on the arrogant side, masters of the universe.
Often, they tell the sellers and existing managers that they value their expertise and want to keep them on with consulting or employment contracts. But that generally is not how it plays out. They soon switch out management. Paying off the management contracts is just part of the price.
Sometimes bringing in the outside hot shots works; sometimes it doesn’t. In one case in my home county, a manufacturing company has been sold three times in two decades and is doing fine. In another case, most of the management team was dispatched in short order and the hired gun cratered the company in less than two years.
The trick for the PEs is to ramp up the cash flow fast in the first year or two and then pull out their equity as soon as possible. So, if it’s a $100 million deal, and the PE puts in $20 million, job one for the PE is to get the $20 million back – even if it means high leverage for the operating company.
Once the $20 million is back in the PE coffers, it’s a free shot for the PE’s general and limited partners. Obviously, the PE would prefer growth for the acquired company. If the company successfully carries the debt service, grows and pays down the debt and then flips at a higher price, it can be a home run. Bain had several of those. Jobs can be added in that scenario.
If the outsiders can’t figure out the business, and the company can’t handle the debt, then comes the reorganization, usually some kind of contraction. Jobs are shed fast. But the PEs are often untouched.
In my home county here in the Heartland, the acquisitions by PEs have cost many more jobs than were added.
There are no convincing studies on the overall job creation success or failure of PEs. Bain had wins and losses on the job front. But it did have success for investors, which accounts for Romney’s estimated net worth in the $200 million ball park. He played the PE game well. (We don’t want a loser for president, do we?) Think of PEs like sharks or wolves: they’re just part, a non-strategic part, of the capitalist ecosystem.
More relevant to the national debate is Bain’s and Romney’s few forays into venture investing. Bain’s investment in Staples early in that company’s history is such an example, and it proved to be a big creator of value and jobs. Another small investment in a startup doll company never got to liftoff. The net result of Bain’s early stage investing was plus jobs by a lot.
Studies on venture capital show that early stage investing creates big job totals. One recent analysis showed that if Wisconsin had the level of venture investing of its neighbor Minnesota, Wisconsin would have 200,000 more jobs – enough to wipe out more than half of the state’s unemployment. Entrepreneurs are strategic drivers of the capitalistic ecosystem.
As with health care, the candidates are talking about the wrong issue: ObamaCare and access, instead of soaring costs, the major issue. For job creation, the number one issue in the nation, they should be talking about spreading entrepreneurship, innovation and early stage investing across every state in the union.
Romney should shift the health care debate to market-based solutions and innovations, and he should shift the investment debate to early stage investing as the ticket back to prosperity. If he doesn’t get relevant on these high priority issues, he’ll get lost in the political bluster.
