Wednesday, September 05, 2012

it's the bust-out, that's all it is...,

RollingStone | So our new magazine piece, Greed and Debt, about Mitt Romney's past with Bain and the use of debt to finance takeovers, is online, and already I'm getting some questions that I am anxious to answer. There's a subtle point about the private equity business that I may not have made clear enough in the piece.

One emailer writes: "You've completely misunderstood what private equity does and ignored the many success stories in the industry. There is a reason why many of PE's biggest investors are unions and pension funds . . . who have benefitted more than once from private equity deals."

This is a valid point. It is true, many of the biggest investors in private equity deals are pension funds and workers' unions. I think this is unfortunate, and I know for a fact that many union leaders discourage unions from investing in private equity takeovers. But it's an undeniable fact that unions and pension funds do sometimes make money on private equity deals.

But what people need to understand about private equity firms like Bain is that they are not in the business of turning around companies and creating jobs. The unions and pension funds that invested in those deals did not do so to rescue companies.

If you invest in a Bain or a Carlyle or a KKR takeover deal, you’re not betting on the future success of whatever company they took over. You're betting on the ability of those firms to make money on the deal, which may – or, just as importantly, may not – involve turning the target company around.

If you borrow billions to buy Dunkin' Donuts and the firm flourishes post-takeover, that's one way for investors to get paid. But another way is getting Dunkin' to take out a $1.25 billion bank loan to hand its investors $500 million in tribute payments.

It's hard to imagine anything that's dumber, from the standpoint of trying to grow a business, than taking out a billion-dollar loan to pay a dividend – one buddy of mine on Wall Street used the word "retarded" – but for a private equity firm and its investors, that might very well be a smart way to get your investors paid.

This is really the point of the piece. The interests of PE firms and their investors do not coincide with the companies that have been taken over, not in the way that Romney and his adherents would have you believe. In fact, they're often at cross-purposes. You invest in a PE deal to make money – not to grow businesses. And not to create jobs.

Again, that's not to say leveraged buyout deals don't work for investors. They frequently do. But such deals are designed for the benefit of the investor – not for the takeover target. It's two different sets of interests that have been mistakenly portrayed, in the press, as being aligned.