the audit

It’s the WSJ‘s Turn on Romney’s Private Equity Record

January 9, 2012

Mitt Romney’s tenure at private-equity firm Bain Capital is the gift that will keep on giving for journalists. Reuters reported last week that a Romney purchase required a federal bailout, even though Bain made big money on it. The Los Angeles Times found last month that four of Bain’s top ten acquisitions went bankrupt.

Now a Wall Street Journal investigation takes the broadest look at Romney’s record yet, examining seventy-seven of Romney’s investments at Bain Capital.

One reason we haven’t seen anything like this before is that Bain won’t actually disclose its investments. It tells the Journal that information is private. But Mark Maremont got hold of a 2000 Deutsche Bank prospectus that lists almost all of the investments made under Romney and documents how they performed.

Which is not an easy determination. The difficult question for the Journal is how to fairly count the failure rate of Bain’s companies. The big beef with private equity is that it typically loads up companies with debt, sometimes solely in order to pay itself special dividends. So if Bain unloaded an investment in weakened condition, it still would bear some responsibility for its failure, even if the bankruptcy was three years after it sold the firm.

The paper handles this issue well, and explains it clearly. It counts any bankruptcy or failure within eight years of Bain’s purchase and tells us why there’s no good way to measure this. On that measure, 22 percent of Bain’s investments ended in bankruptcy, which the Journal reports is a large number (though it runs into difficulty finding a precise benchmark). It also reports that 12 percent went bust within five years. It’s important to note, as the Journal does, that you would expect bankruptcy rate to be higher for private-equity investments like Bain’s, since they typically target out-of-favor companies.

But it’s axiomatic that increasing a company’s debt raises its odds of failure. The reason Romney and Bain could make such extraordinary returns—50 percent to 80 percent annually—despite a high rate of failure is that they were levering up their investments with debt, which magnifies returns, both positive and negative. Bain may have turned some of its investments around through its managerial expertise—and we need more reporting on that angle—but it made the companies it purchased inherently riskier, giving itself most of the upside and leaving most of the downside to workers and the bondholders who financed it.

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You can see this effect in the graphic accompanying the story listing the top ten most profitable investments made by Romney. Four of these firms would go bust despite making enormous profits for Bain.

But the fact that some of Bain’s biggest winners later landed in bankruptcy court “is potentially damning evidence” that the firm left the companies in vulnerable shape, said Mr. Strömberg, the Swedish academic.

This is good stuff, but I wanted more from this story. There’s not much here about layoffs or the amount of debt Romney put on them. The paper doesn’t post the Deutsche Bank document online or list the seventeen failures it counts. This is one of those Murdoch-era Journal stories that really could have used another 500 or 1,000 words for color and context.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.