The story of Mitt Romney and Bain Capital begins long before the 2012 Election, before Romney’s abbreviated 2008 presidential bid, his four years as Governor of Massachusetts, and a decade before his attempt to usurp Ted Kennedy from his Massachusetts Senate seat in 1994.
Bain Capital spawned through a simple revelation by Bill Bain, then-CEO of Bain and Company, the domineering consulting firm founded, as you can probably guess, by Bill himself. After years of overwhelming success, Bill Bain realized that when his consultants were successful with a client, the company’s stock almost always rose much faster than that of its competitors. In short, Bain was missing out on countless lucrative opportunities. “While Bain & Company had been well paid,” writes the Boston Globe, “Bill Bain and his senior partners decided they were reaping only a small share of the value of their work.”
Thus, with the vision of fusing Bain and Company’s consulting acumen and brain power with investments in undervalued, underperforming companies, Bain Capital – essentially a seven member startup – was born. As easy as it is to reverse engineer Bill Bain’s revelation today, private equity was in its infancy at the time. Bain would buy companies, scour them for efficiency, and sell them for a profit, ideally in a healthier state than before the firm’s involvement.
Although only halfway through his thirties, “The partners quickly agreed Romney should lead the new enterprise,” writes the Globe. “Bain trusted Romney to be prudent and not tarnish Bain’s name.”
It wasn’t until two years after opening its doors that Bain Capital made its first investment — a delay that many recall had the previously unflappable Romney sweating, literally and figuratively. In March of 1986, the first Staples store opened in Brighton, MA through a $650,000 Bain investment. Staples’ recent ubiquity makes it difficult to remember the state of the company in 1986, but Bain’s investment was technically a venture deal, something Romney sought to avoid in the future.
Although the deal succeeded greatly and reeled in $13 million on $2 million in total investments, Romney was uncomfortable investing in mostly young, unproven businesses. Instead, the company focused on leveraged buyouts of established companies with the potential for improvement and growth. Says the Globe, “Leveraged buyouts played to Bain Capital’s analytical strengths and Romney’s caution. If venture investing requires vision, leveraged buyouts demand precision.”
Bain’s most common strategy was to hold companies “for five to seven years” but sometimes “Bain invested in a quick flip,” said partners via the LA Times.
Over Romney’s 15 year career with Bain Capital, he helped turned $37 million and seven employees into 115 employees and $4 billion. For his efforts, he amassed a personal wealth of up to $250 million, depending on the estimate.
Late last year the LA Times dug up a Deutsche Bank Alex. Brown prospectus (included below) prepared for potential investors in 2000. The document lists 68 companies in which Bain Capital invested from 1984 to 1998 — almost all of Romney’s career with the firm — and points to a number of remarkable statistics, including the following:
Bain Capital’s internal rate of return averaged 88% per year for every year that Romney headed the firm. Hypothetically, if an investor could have put in the required minimum of $1 million when Romney started Bain in 1984, and left it there for reinvestment in successive Bain funds until Romney departed in 1999, the investment would have grown to over $12 billion.
Bain achieved these incredulous returns through, as the prospectus points out, “its demonstrated belief that a combination of strong management, sound fundamental business analysis, focused strategy, and aggressive action substantially improves a business’s profits and value.”
The tales behind each deal that Bain completed under Romney’s tutelage include fairy tales of mutual success, oft-cited examples of “vampire capitalism,” and regretful partnerships ending in shared disappointment. Most deals fall in the first of the two categories. Here are a few.
GS Industries was the tenth largest investment under Romney. Bain created GSI in the early 1990s using $24 million to buy and merge a number of steel companies with plants in the Southeastern US.
Almost immediately Bain cut jobs, yet continued to reap management fees and a $65 million dividend. In the end, more than 700 employees lost their jobs. Bain partners, however, collected “about $50 million on their initial investment,” writes the LA Times. Of the deal, GSI steelworkers union official at the time David Foster told the Times the following:
“Bain was demanding certain financial performance with no understanding of what the problems were on the ground,” … He said Bain “bled the company,” withdrawing cash for dividends and management fees even as circumstances in the steel industry deteriorated.
The tale has recently become a preferred example of “vampire capitalism” called upon by President Obama and featured in the Romney Economics website operated by the Obama campaign.
But GS Industries’ decay is far from the typical Bain deal. In 1986, Bain acquired Firestone’s wheel-making division, known then as Accuride. In one year, after Bain rebuilt the company’s production capabilities and redesigned its executive pay, Accuride increased its number of plants by 16%. Bain sold the company after just 18 months and turned its $5 million investment into over $120 million.
Another widely referenced “Bain success story” comes out of Fort Wayne, Ind., and Steel Dynamics. In 1994 Bain injected $18.2 million into the steel manufacturing company. Four years later the company went public, and it now pulls in $6.3 billion in revenue and employs 6,000 workers.
Many of the companies Bain bought under Romney grew, yet many also went bankrupt soon thereafter. The New Yorker, quoting a piece from the Wall Street Journal, writes “more than one in five of the companies that Bain Capital invested in between 1984 and 1999 went bankrupt or shut down within eight years of Romney and his colleagues getting involved.” As expected, Romney’s supporters argue that Bain cannot be responsible for companies actions after they sell their investment. There is certainly some truth to this, eight years is a long time for a young company. Just think of where Facebook was in 2004.
In the end, it is important to keep in mind that Bain Capital was at no point designed as a job machine. Like all investment vehicles, it was designed for returns for its investors. This point is best made by MIT Professor of Sloan’s School of Management Howard Anderson said to the Globe:
Bain Capital is the model of how to leverage brain power to make money. They are first rate financial engineers. They will do everything they can to increase the value. The promise (to investors) is to make as much money as possible. You don’t say we’re going to make as much money as possible without going offshore and laying off people.
Today, what was once a seven man startup sent to test the waters of what Bill Bain felt to be a market opportunity in private equity, manages $66 billion in assets. While Mitt Romney hasn’t worked for Bain in thirteen years and held countless different roles since vacating his post at the firm, it is his work in the private equity industry under daily scrutiny. Is Romney’s time with the firm important? Absolutely, it is a definitive piece of his career, but it is important to understand Romney’s full history with Bain when judging his potential ability as President, for better or worse.