The Obama campaign is based on the liberal/progressive vision of – using the President’s own word – a “transformed,” government centered, society and economy. Their central campaign tactic is to discredit the traditional American vision of individual autonomy and economic freedom by demonizing entrepreneurs, investors and successful business leaders.
The latest Obama stink bomb is a super pac ad seeking to smear Mitt Romney through yet another attack on free market business. It’s a two minute video about a steel mill that was owned by Bain Capital, the private equity firm led by Mitt Romney back in the 1990s. Bitter former employees who lost their jobs when the mill went bankrupt and closed say Mitt Romney and his investors bought the mill in order to somehow profit by shutting it down.
The media herd piled on. The usual TV commentators who know a lot about politics and emotionally charged language but little or nothing about business, ignorantly slandered private equity as morally equivalent to the mob, “extracting huge profits” by destroying companies and abusing forlorn employees.
It’s up to us at Liberty Works to do what the TV gasbags are unable or unwilling to do, objectively describe private equity.
- Private equity firms pool their own resources, actually the personal funds of the firm’s owners, with investor funds and bank loans to purchase businesses they believe are under performing and can be made more profitable and more valuable with some combination of new capital and management expertise.
- While some of the investors are individuals most invested dollars – 80% or more – come from pension funds and endowments. Through their pensions millions of “regular folks,” including police officers, teachers, and employees of states, cities, hospitals and universities are private equity investors. Endowments include those that have been set up to support universities, medical research and other good works. When private equity deals succeed the lion’s share of the rewards go to these institutions, not to “fat cat wall street players.”
- Private Equity firms have a fiduciary obligation to manage the funds under their stewardship for the benefit of investors.
- Pension funds and endowments invest most of their funds in low risk, low return assets like Treasury and corporate bonds. In an effort to increase their overall return they may allocate a small portion, usually 4% – 15% of their portfolios to higher risk investments that have the potential to generate higher returns. Enter private equity, through which they buy a portfolio of companies to hold for a limited period, usually no more than ten years and then sell for a higher price.
Now, consider the media fueled charges that Romney’s Bain Capital bought healthy companies “loaded them down with debt” and somehow profited by shutting them down. In reality a private equity deal has three, sophisticated, hard-nosed, clear eyed overseers, each risking assets he/she owns or manages and his/her reputation as a prudent investor and steward of assets held in trust:
- The private equity firm’s owners who are putting their own assets at risk;
- Pension and endowment fund managers who are risking assets they are obligated to manage prudently;
- Bankers who do not make loans without prior due diligence.
None of these overseers would have any interest in a strategy of buying a healthy, profitable company with the hope of somehow increasing the value of their investment by bankrupting it and shutting it down. In the real world, the no-nonsense world of real investors and real business managers such a scheme would be laughed out of the room.
What private equity deals do acquire are businesses that the investors and bankers believe can be made more valuable through growth. In today’s investment environment growth is the most important consideration. Growth makes a business more valuable, and thus a success for the investors in private equity. Growth usually requires additional employees. Thus the private equity management team serves the interests of investors by creating new jobs.
Sometimes consolidation is necessary to clear the way for new growth. Consolidation usually means shedding unprofitable, or obsolete product lines and/or facilities and may include layoffs. But the subsequent growth phase virtually always requires hiring additional employees.
Some of the businesses private equity deals acquire are profitable but under “tired” management and are thus at risk of decline. Some have already declined and are at risk of bankruptcy. Such was the state of the GST steel mill when it was purchased by a private equity fund led by Mitt Romney’s Bain Capital.
GST had already laid off several thousand employees over a decade of decline and there were approximately 750 left. The mill made only two, nearly obsolete products, grinding balls and wire for wire rope. Both of these were low value added products sold to end markets like mining and dredging, that were having difficulties of their own at the time. Bain invested in new machinery and technology to enable the mill to produce more modern sheet steel products. As a result, what had been a doomed company lived on for a few more years.
Ultimately, imports and union intransigence caused the demise of the plant, similar to dozens of other facilities making low value added products in the 80s and 90s.
Obama’s attack ad doesn’t mention another Bain Capital investment in the steel business, Steel Dynamics Inc. or SDI. It was a new start-up mill when Bain got involved. With technology provided by Bain and its investors SDI became the fifth largest producer of steel carbon products in the US, growing from 1,000 to over 6,000 employees.
Over the years Bain Capital’s success rate is 84%. That is 84% of the business they purchased increased in value, while 16% decreased and/or went out of business. The 16% are companies that would have failed anyway, that Bain tried to save.
The Obama Administration intervened with strong-arm, extra-legal means to drive the brutal bankruptcy reorganization of General Motors and Chrysler. The primary goal was political, to bail out and strengthen the United Auto Workers Union at any cost. Bond holders, including pension funds, that under the law were supposed to be repaid first in a bankruptcy proceeding were elbowed to the back of the line and stiffed. The reorganization of GM ended production of the Saturn, Pontiac and Saab product lines, closed plants, closed hundreds of dealerships and killed tens of thousands of jobs. Yet the same establishment media that denounces Romney and private equity applauds Obama for “saving the auto industry.”