Private Equity 101: A Mitt Romney Primer

In some rare instances, a company that has certain types of undervalued assets, worth far more than its financial records state, could be bought and then broken up. If a PE-owned company does go bad, which they do from time to time even if they’re among the portfolios of the most skilled PE firms, then the assets would get sold off and employees fired.

And oftentimes that failure was likely to happen no matter who owned the company.

There are opportunities to buy a group of competitors in the same business and combine them together in order to derive operating synergies or to optimize pricing power in the market. When that happens, there will invariably be some downsizing that will occur, particularly among the corporate staff. Overall, at least in those scenarios, the combined businesses might grow and add different types of employees, such as sales or manufacturing staff.

Bain Capital was one of the early pioneers in being smart, buying good companies, improving their operations, and legitimately growing them. I don’t have immediate access to data to comb through regarding employment at the companies in Bain’s portfolio, but I’d bet that thousands of jobs were created across its portfolio of companies through both skilled financial engineering and better day-to-day operations.

PE is not investing for the faint of heart. When a company is bought, it might be five years before it can be sold to another PE firm or industry player, often without any returns before then. That’s a lot of financial risk over a long period of time -- a period where lots of bad things could happen. During Romney’s tenure at Bain, its return on investment was off-the-charts excellent.

My final conjecture on this issue: if Bain buys a lot of companies and subsequently blows them to pieces, the wreckage is actually only contained to three entities: the employees of those companies, Bain management, and Bain’s investment partners. And Bain would then be unsuccessful, unable to raise the next funding round. However, if the federal government invests in businesses and blows their wad, not only do all the employees get canned, but the debris pile of wreckage includes all taxpayers. On top of that, the government doesn’t have to justify itself to immediately do it again and raise the next fund!

Finally: which candidate running for office has presided over the creation of thousands of jobs, and which candidate has presided over the loss of millions of jobs?

Also read: "Pelosi: GOP Knows Romney Can't Win"