What Did Romney Do at Bain?

At any time, the Wall Street Journal's article on the fate of companies that Bain Capital invested in during Romney's tenure would have probably made a splash.  But luckily for the commentariat, Romney gave the story a nice push by making a really incredibly stupid gaffe--remarkably, the biggest one he's made in months of hard campaigning.

The result has been predictable: the left (and some of his opponents) are accusing Romney of exemplifying predatory capitalism that destroys firms, jobs, and lives, while the right defends his work as creative destruction.  What's the truth?

First, the particulars.  From the WSJ:

Amid anecdotal evidence on both sides, the full record has largely escaped a close look, because so many transactions are involved. The Wall Street Journal, aiming for a comprehensive assessment, examined 77 businesses Bain invested in while Mr. Romney led the firm from its 1984 start until early 1999, to see how they fared during Bain's involvement and shortly afterward.

Among the findings: 22% either filed for bankruptcy reorganization or closed their doors by the end of the eighth year after Bain first invested, sometimes with substantial job losses. An additional 8% ran into so much trouble that all of the money Bain invested was lost.

Another finding was that Bain produced stellar returns for its investors--yet the bulk of these came from just a small number of its investments. Ten deals produced more than 70% of the dollar gains.

Some of those companies, too, later ran into trouble. Of the 10 businesses on which Bain investors scored their biggest gains, four later landed in bankruptcy court.

I think you can tell two stories from this data--and without looking at each individual case in depth, it's really hard to tell which story is right.

Certainly, there are private equity deals--and maybe firms--that don't add social value.  They cash out existing shareholders by burdening the company with a lot of debt, and then either take the company public again or take it into bankruptcy.  I've heard it suggested that to the extent these deals unlock value, they do so by getting cooperation from management insiders--which sounds suspiciously like either "collusion" or "bribing them to do their jobs".

On the other hand, private equity deals can shake loose dysfunctional managements that have been systematically running the company into the ground, provide capital and management advice to struggling firms, or give fledgeling companies the push they need to soar.

Either of these stories works with the facts laid out by the Journal.  There's a broad spectrum of private equity strategies, from pure cash-flow plays that sell off underperforming assets, to something more akin to a corporate turnaround specialist.  Bain is closer to the latter than the former--their "special sauce" is that they have a sort of consulting approach to financial problems (and often, the cream of Bain Consulting's talent, from which they recruit heavily.)

Turnaround situations, and new firms--both of which Bain says it focuses on--probably have a higher failure rate than "sell off an obviously undervalued asset" or "fix a simple cash flow problem".  Which could also explain a high failure rate.  It's probably a somewhat simpler operation to predict whether you can sell off a division, than whether you can revamp the product line to make it sell to the tween segment.

Largely, I expect people are going to believe what they want to believe; if you're invested in the notion that finance is useless and predatory, you'll see Romney as a predator; if you valorize markets and business, you'll tend to see Bain's record as admirable.

Me, I don't know.  Pending more information, I'm suspending judgement.