A Short Riff on the Bain Capital Issue:

“The idea of making a short term profit actually doesn’t exist in business…”

Mitt Romney on the campaign trail this week.

In 2006 a study entitled: Value Destruction and Financial Reporting Decisions, John Graham and Campbell Harvey of Duke University – Fuqua School of Business and Shiva Rajgopal of The Goizeta Business School at Emory University in Atlanta reported that an astounding 78% of the executives surveyed for their report would legally destroy economic and shareholder value (by doing such things as eliminating value building projects if those projects were a risk to short term profits) in exchange for smooth and predictable quarterly earnings.

Which of these two points of view do you think is most accurate?

The Riff:

OK, I haven’t looked at Bain Capital’s record. I know that they have invested in some companies that are now alive and well and going strong. But here’s the truth, not all private equity companies are created equal. Some actually do destroy companies, perhaps not intentionally, but with a view towards making their money first, despite what happens to the company or its employees. They buy a company; leverage that company to the hilt so that they can pay themselves management fees. During the “turn around” period they force the company to buy raw materials from other companies owned by the firm or their partners at above market rates (According to an banker I know on the street with knowledge of this situation, this is one of the things that put the maker of my beloved Twinkies into bankruptcy), then, once they’ve taken their pound of flesh, they flip the company to another PE firm who egotistically think they can “turn around” this dog or they simply put it into bankruptcy. It happens all the time and to presuppose anyone who would ask a question about whether Bain did this sort of thing or not is “assaulting” the free markets shows either a purely political point of view or an ignorance of what happens in the free markets that is typical of politicians, pundits and anyone else who is not in the trenches of real capitalism.

Now it took me no time in terms of research to find out that Bain did do a dividend recapitalization of KB toys in 2003, which is just a fancy way of saying they issued debt in order to get their money out when they decided they couldn’t compete in the toy market. Sure, that might be a smart way to pay back their investors without actually turning the company around, and yes its business as usual. The question then is; is it fair to ask if this is the type of capitalism we want practiced in this country today? As a capitalist who cares as much about creating something of social value (like jobs) as I care about making money, I’d say this is a fair question. Not an indictment of the entire capitalist system.

Joe Scarborough said this yesterday morning on Morning Joe: “… it’s one thing if you go and you take a company that is going down hill and you invest, you try to turn it around, sometimes you succeed and sometimes you fail, when you fail, people loss their jobs…” This is true, the issue that many people have with some (not all) private equity shops is that often when the PE firm fails to turn the company around, they still find ways to make their money. Jobs, employees, neighborhoods and families be damned.