Bain and Mitt Romney: What’s Fact and What’s Opinion
A few people wrote to me this morning asking me about Dan Primack’s critique of my Romney piece ("Greed and Debt," August 29) on CNN.com. His article ("Greed, Debt, and Matt Taibbi") purports to provide a list of factual inaccuracies, but like a lot of these pieces that pore through long features in search of mistakes, the resultant list ends up mainly being a discussion of non-factual issues where Primack and I simply disagree.
For example, take this passage, where Primack quotes me and then critiques:
"Now your troubled firm – let's say you make tricycles in Alabama – has been taken over by a bunch of slick Wall Street dudes who kicked in as little as five percent as a down payment."
While perhaps there have been certain leveraged buyouts that involve just 5% equity, the typical contribution is significantly higher. For example, S&P Leveraged Commentary & Data reports that average LBO equity contributions since 1997 have come in between 28% and 45%. Still a debt game, but not quite so severe.
This is exactly why I used the term "as little as" five percent. I referenced two Bain deals where the company put down such obscenely small amounts of cash to take over companies: the Ampad deal where they put down $5 million to take over a company that was eventually forced to take on over $448 million in debt, and the KB deal where Bain put down $18 million and financed the remaining $302 million (meaning Bain put down more or less exactly five percent on the deal). I then noted, in the piece, that most LBO deals are 60-90% financed, which is not quite exactly but very nearly exactly what Primack says (his numbers are 65%-72% financed), except that he got his data from the S&P Leveraged Commentary & Data, while I got mine from the Journal of Economic Perspectives.
So Primack’s point, I guess, is that I misrepresented how much a PE company typically puts down in a takeover deal, except that I actually went out of my way to point out how much of these deals are typically financed, and then used two concrete examples from Mitt Romney’s own past (remember, this is an article about Mitt Romney) to point out extreme cases, which Primack admits “perhaps” do happen.
Then there’s this, using the same quote-and-critique method:
"So Tricycle Inc. now has two gigantic new burdens it never had before Bain Capital stepped into the picture: tens of millions in annual debt service, and millions more in "management fees." Since the initial acquisition of Tricycle Inc. was probably greased by promising the company's upper management lucrative bonuses, all that pain inevitably comes out of just one place: the benefits and payroll of the hourly workforce."
Or perhaps the company has enough cash flow to cover both in the short-term, while future growth (based on changes enacted by the PE firms) helps bump up profit. There are no hard and fast rules. Even when a PE firm does lay off portfolio company employees post-acquisition -- not an uncommon occurrence -- it isn't always for financial reasons. Sometimes it's because the new strategy is to de-emphasize or shut down a non-core part of the business, or a unit with declining growth (albeit one that is still profitable). Taibbi makes it sound like buy-then-fry is private equity's modus operandi. It is not. And, in the long-term, private equity ownership does not have a significant impact on a company's payroll.
Actually what I say here is that when a PE firm takes over a company, it adds two huge new financial burdens to the firm’s bottom line, in the form of debt service and management fees – and perhaps a third, in the form of big bonuses paid to management to grease the transaction. Primack says nothing about this, moves on to a sentence about how when PE firms fire people, it isn’t always for financial reasons, and then in the end he quotes a study that purports to show that PE ownership has no significant impact on payroll.
If Primack feels comfortable saying that adding hundreds of millions of dollars in new debt to a company and extracting millions more in fees and dividends has no impact on payroll, then he, and the esteemed writers in that study, are certainly welcome to make that argument. I’d be happy to introduce him to some former KB Toys employees who’d love to hear what all those folks have to say about that. It seems to me that when there are deals like the KB situation when the investors, the PE firm, and senior management all made millions of dollars in the middle of a bankruptcy that later resulted in everybody else losing his job, you don’t need an academic study to tell you where the “impact” was felt.
Then there’s this:
"In the Bain model, the actual turnaround isn't necessary. It's just a cover story. It's nice for the private equity firm if it happens, because it makes the acquired company more attractive for resale or an IPO. But it's mostly irrelevant to the success of the takeover model, where huge cash returns are extracted whether the captured firm thrives or not."
This just isn't true. The reference here is to dividend recaps, a noxious private equity practice through which firms can actually generate profits off of investments in portfolio companies that later go bankrupt. But the reality is that, for the most part, dividend recaps alone do not generate the types of returns that bring limited partners back for follow-on funds. Moreover, too many post-recap failures and banks are unlikely to make new loans to fund a private equity firm's future deals (original LBOs or recaps). In other words, the more legitimate wins matter, so long as the private equity firm wants to stick around.
Here Primack is just being disingenuous, particularly in this line:
But the reality is that, for the most part, dividend recaps alone do not generate the types of returns that bring limited partners back for follow-on funds.
This is wild. In the piece I point out that PE firms take over companies and then can induce those companies to pay out massive dividends to their new masters, often taking out giant bank loans to do so. I cited multiple concrete examples of this, like the KB deal where the failing company was induced to pay out a $121 million dividend (financing this with $66 million in bank loans), and the Dunkin’ deal, in which Bain and Carlyle induced Dunkin’ to pay a half-billion dollar dividend, taking out a $1.25 billion loan to finance it.
Primack now takes these passages and calls them factually lacking by arguing that dividend recapitalizations – "for the most part" and "alone" – aren’t a sweet enough carrot to keep investors coming back to the next deal. Which has nothing to do with what I was talking about.
I was never talking about what’s in these deals for Romney’s partners and investors. I was talking about what’s in it for Bain and Romney. And nowhere do I ever talk about whether dividend recapitalizations, "alone," are sufficient to “bring limited partners back.” It would be silly to say that they are.
Instead, the whole "cover story" passage was intended to explain an important point: it’s certainly better for the PE firm if the company turns around, but if it doesn’t, that’s not so bad either, since if all else fails, they can just always just rape the acquired company. And while the "dividend recaps" aren’t by themselves enough to bring investors back to the next deal, you can bet they wouldn’t come to any PE deals at all if the PE firms they invested with didn’t possess this "rape in case of emergency" weapon in their financial arsenals.
As an investor, do you really want to throw your hard-earned cash into a company to whose bottom line Mitt Romney just added $300 million in debt? In a company that just borrowed $300 million not to buy new equipment or invest in R&D, but just to buy the "asset" of new management by Mitt Romney? In a vacuum, you probably wouldn’t invest in that firm – but if you know Romney can force the company to pay out a $120 million dividend on demand, taking out huge bank loans if need be, you’d feel a lot safer.
My point isn’t that it’s not good for PE firms when companies turn around, but that the system is set up so that they don’t have to make companies turn around in order to make profits on takeovers.
Is it better for Bain if a company like Ampad turns around? Absolutely. Did they make a 2000% profit anyway burning the firm to the ground when it didn’t? You bet.
In the long run, sure, a company like Bain will suffer if it leaves behind nothing but a pile of corpses, since that will scare away even the most clueless investors. (Of course that cluelessness can persist for a long time – this same pool of investors needed a world meltdown in 2008 to convince them to stop buying the subprime mortgage bonds bank hucksters were selling them).
But the fact that the occasional bloody casualty not only doesn’t dent the bottom lines of PE firms, but can even enhance them, makes this a very particular kind of capitalism – highly socially destructive, with little or no risk to the PE firm, but with the potential for massive profits to the Bains of the world even when they add zero or negative value to their takeover targets.
I think that sucks. Primack disagrees. He thinks it’s more significant that “legitimate wins matter” in the long run, while I think it’s more significant that they don’t matter in the short run.
This is what you call a difference of opinion. It’s the difference between believing that PE is socially beneficial and believing, as I do, that it’s often predatory and antisocial. It would be healthy to hear this debate aired out normally, but in this case, Primack depicts that disagreement as factual inaccuracy on my part, which is just obnoxious. We just don’t go there in this business unless it’s true (mainly because most experienced writers are cognizantof the "there but for the grace of God" factor when it comes to factual mistakes); you have to learn to distinguish between what is absolutely a wrong fact and what you think is a wrong opinion.
The bit at the end of his piece is a classic example. I quoted Steven Feinberg of Cerberus Captial saying he’d happily kill any employee of his who gets his picture in the paper as part of a larger point that PE titans keep extremely low profiles, compared to the corporate owners of America’s past. Here there was the undisguised implication that PE raiders keep low profiles because the reality of what they do is so shocking and nauseating to the general public that shining a light on it can only hurt their businesses. This was contrasted with the businesses of Rockefeller and Hershey and Ford, who were so proud of what they’d built, they erected museums to their accomplishments and named everything from towns to schools after themselves.
Primack countered by pointing out that Feinberg is an aberrational recluse and that Steve Schwartzman has his name on the New York Public library and Henry Kravis’s name is on a building on the Columbia Journalism School.
Now, Primack admits his own friends don’t know what the hell private equity is. Nobody does. These guys are the richest men in America and nobody knows who they are or what the hell they do for a living. If Primack went to a Cleveland Browns game and worked his way around the stadium asking crowd members what private equity is and what Steve Schwartzman does for a living, how many people in the crowd would have a clue? One in a thousand? Ten thousand?
The kicker to me came when Primack wrote that “many private equity executives appear regularly at financial conferences and on financial television networks like CNBC,” as if that was proof of anything other than the fact that even a private equity executive doesn’t mind getting sucked off on live TV like all the other Wall Streeters who agree to make guest appearances on CNBC.
When Thomas Lee Partners builds a museum to the dividend recapitalization in the Georgia town where 1,000 people used to work making Simmons mattresses (before THL paid itself a $375 million dividend on the company's dime), then we can talk about the willingness of private equity executives to proudly show their faces anywhere outside Maria Bartiromo’s lap and a surrounding strip of Manhattan about the size of the U.S.S. Carl Vinson.
As to the characterization of the Blackstone group as “Democrat-leaning assholes,” Primack disagrees with both the “Democrat-leaning” and, it seems, the “assholes” part, correctly pointing out that Steve Schwartzman and Pete Peterson have long histories of supporting Republican causes. My characterization was more about the firm’s profile in the time period covered in that passage, in the early nineties, when Blackstone had Roger Altman as its vice-chairman; Altman left Blackstone to be Deputy Treasury Secretary under Clinton, whom the firm supported in the 1992 election.
Still, upon reflection, maybe I would have written that passage differently. The rest of it? The bit about “the Mitt Romneys of the world” causing the 2008 crash is, as Primack guesses, a rhetorical device: I meant that phrase in the sense of “greedy, bloodsucking Wall Street pirates who extract huge fortunes for themselves without adding value to society,” and not in the sense of “heads of private equity companies.” He thinks that’s “unfair,” but that’s different from being factually wrong.
And the bit about PE deals tracking upward with the tech bubble: again, he guesses correctly that I’m talking about the indirect consequence of easy money leading to more funding for PE deals, not that private equity firms took over dot-com companies. He finds this confusing, despite the fact that I’d spelled this out – “takeovers rose sharply with each of Wall Street's great easy-money schemes” – but even if the clarity of the writing here is insufficiently penetrating for his tastes, that is, again, very different from it being factually inaccurate.
Private equity firms like Bain wouldn't exist if some people didn't think they made economic and political sense, so obviously someone is going to cry foul when we publish a piece like "Greed and Debt." Primack's piece pretty much sums up the counter-argument, which I personally don't think is terribly convincing, but there it is. Is it time for the Giants-Cowboys game yet?
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