I had promised a RealJock.com member that I would review the history of Bain Capital and post information to this blog. Knowing myself rather well, I suspect this is a post that will first grow, then contract, and ultimately rest as a rather convoluted creature. Why? Such is the nature of venture capital/hedge/”let me use your money” companies. Such companies are often ill conceived entities whose primary purpose is to use your cash to build the company principals ‘personal balance sheet.’ Now isn’t that the purpose of any company? Sure. Companies such as Bain Capital are in my humble view, simply sour.
Jobs. This is the issue that relates to Mitt Romney’s run for the Office of President of the United States. Did Bain create jobs under the leadership of Mitt Romney? Sure. Were jobs lost under the leadership of Bain Capital by Mitt Romney? Sure. (After all, dissolving a company in bankruptcy court is not an act of job creation folks.) Was there an overall positive increase in employment across all entities Bain Capital touched? Yes. Was net job creation over 100,000? I would say definitely not. Furthermore, Mitt Romney himself cannot answer that question with a number that can be validated. Mitt can point to Staples today, but Staples was young when Mitt was at Bain; while the growth of Staples saw dramatic increases in employment with growth, it also pounded out reductions in employment at competitors, i.e., Bain was very effective at job transfer, not net job creation.
Taking a look at the Bain Capital homepage is worth the effort.
The text reads: “Bain Capital is one of the world’s leading private, alternative asset management firms whose affiliates manage approximately $60 billion. Our principals are the largest single investor in each of Bain Capital’s funds, which aligns the interests of the firm with our investors and the long-term objectives of the management teams.”
Now……….how does this work for the “principals” cited above. I’ll place some quick and dirty comments here and flesh this out with validated detail later:
- When you invest with Bain several things happen. The first is your funds are applied as Bain sees fit to apply them within the limits specified in the fund prospectus. Above, for Bain’s $60,000,000,000.00, Bain will collect around $2,100,000,000.00 in “management fees.” (That’s two-billion one-hundred million and no/100 dollars.) A portion of that will be paid from profits of the fund. If there is no profit, your investment is hit.
- It gets richer. Bain will end up with shares of the fund, i.e. some of your money. Bain principals will collect “carried interest.” A portion of profits — if there are any — that are the target of Obama and yes, Mitt Romney. (Hear his Florida political managers comments yesterday that Mitt promptly drew back, i.e. “you weren’t supposed to tell the electorate my plans stupid.”)
- The various fees, rewards, etc. ALWAYS highly burden the underlying performing asset, e.g., Staples or Toys R’ Us, etc. Keep in mind if a group of investor’s had the financial clout to go to a bank syndicate to borrow funds to bootstrap a Staples, there would be no need for Bain Capital in the venture capital role.
- If one looks at the total cost of capital to a business entity using a Bain Capital for funding, you may very well see an effective rate on that capital at times as high as 30%.
Where does what is in effect a 30% interest rate come from? The business entities cash flow. Now you see why almost ALL acquisitions by entities such as Bain are loosing propositions. You also see why payrolls fall and operations are offshored. The load on the underlying entity is unreal. It comes from leverage (Bain borrowing to purchase the entity) and fees pumped up the chain (that 30%) to Bain.
Is this efficient Capitalism? Most definitely not. Why does this happen? Because the average person can not and will not effectively invest if not using a Bain. The term “shark” is appropriate friends.
Now do think think for one instance that I desire to bring to an end the existence of companies such as Bain. I do not. These companies have a role in a Capitalist economy. What I do not want to see is a government run like a Bain Capital.
See the next post: “conservativejock thoughts on capital formation.” Hopefully it will describe a mode of operation that is a polar of the Bain model.