View Full Version : A Balanced and Objective View of Venture Capitalists

Paul Pless
01-13-2012, 09:58 AM
Was Mitt Romney a job-creating turnaround artist? Or was he, as some on the campaign trail have said, a "vulture capitalist"? That question has become a top issue in the Republican presidential primaries.

In the 1980s, Romney ran a private equity firm called Bain Capital. It's an industry where it's hard to avoid getting your hands dirty.

Here's what private equity firms like Bain Capital do: First, they go out and find a few large investors usually pension funds, university endowments and possibly wealthy individuals. Then, says Ohio State professor Steven Davidoff, they take that money, borrow a lot more and buy companies usually companies that are in trouble or undervalued.

"They buy them in hopes that they can increase the value of the companies and sell them at a fantastic profit," Davidoff says.

Romney made a fortune doing just that. He also provided big returns for his investors. The problem is, in an effort to make companies more valuable, he also shut down factories and cost people jobs. That led one of his opponents, Texas Gov. Rick Perry, to suggest Romney was a "vulture capitalist."

"There's a real difference between venture capitalism and vulture capitalism," he said. "Venture capitalism, we like. Vulture capitalism, no."

Another candidate, former House Speaker Newt Gingrich, characterized what Romney did at Bain Capital similarly.

"Those of us who believe that in fact the whole goal of investment is entrepreneurship and job creation, would find it pretty hard to justify rich people figuring out clever legal ways to loot a company, leaving behind 1,700 families without a job," Gingrich said.

Steven N. Kaplan, an expert on the private equity industry, says that's "ridiculous."

"Looting a company and destroying a company does not create value," says Kaplan, also a professor at the University of Chicago Booth School of Business. "At the end of the day, in order to make money, you have to sell the company to somebody, and if the company ... has been looted and is unproductive, nobody is going to buy it."

The public relations problem for private equity capitalists at firms like Bain, KKR and Blackstone is that they're the agents of the creative destruction part of capitalism. They aim to take over underperforming firms and operate them more efficiently. Davidoff, who worked on merger and acquisition deals as a lawyer before becoming a professor at Ohio State, says there's no doubt that in that process people can get hurt.

"Sometimes operating them efficiently means that employees lose their jobs, plants are closed down and companies are restructured," he says.

Still, there's no doubt that private equity firms create value. Kaplan says research shows that from 1993 through 2008, money invested in private equity firms produced much higher returns than money invested in the stock market. That also benefited many typical Americans through the public and private pension funds that are big investors in the industry.

As for job gains or losses, Kaplan says the direct effect in companies taken over by private equity firms is pretty much a wash.

"Employment ... grows. It maybe grows a tad less than in other companies, and what you concluded from that is that the companies have become more productive," he says.

More productive firms need fewer workers for the same output. Of course, if the underperforming firms had not been taken over, might they have lost lots of jobs because they went out of business?

Davidoff says a more valid criticism of private equity firms is that their managers make use of a lucrative loophole to cut their tax bill.

"The barons of private equity are probably paying a lower tax rate than their secretaries, in terms of percentages," he says.

That's because they structure their compensation in a legal but controversial way, so they pay the capital gains rate of 15 percent, instead of the top rate on ordinary income of 35 percent. That has saved private equity managers billions in tax payments.

The original piece on NPR: link (http://www.npr.org/2012/01/13/145104138/in-gop-campaign-private-equity-firms-draw-flak)

Ian McColgin
01-13-2012, 10:12 AM
Heard most of the program driving. The NPR dialog was quite good with some very careful analysis that seemed to show that in the net analysis it's about a wash where sometimes the communities in which major firms went to venture lost a couple of percent compared to general growth/loss and sometimes gained. THe program exposed the many soft numbers, like how claims of "added jobs" involved gaining employees from competing firms that the ventured firm put under - that's not added, just shifted - and "lost jobs" that were doomed no matter what.

Romney's claims of job creation are shearest fantasy and he knows it, however it must be said that Bain was never the flat out corporate raider that some other outfits were earlier in the '70s. So long as he boasts speciously about job creation, his numbers will be attacked, sometimes fairly and sometimes just as speciously as his empty posturing.

Paul Pless
01-13-2012, 10:23 AM
I'm actually willing to extend Romney some credit on the job front in that even if he didn't create jobs or the jobs gained versus lost is a wash; I do think that venture capitalist firms such as Bain Capital probably did save more firms and saved more jobs than if those same firms had not been taken over. Where I'm critical, not of Romney, but of the system is in the tax loophole mentioned at the end of the article.

Peerie Maa
01-13-2012, 10:31 AM
That is not venture capitalism.. That is Asset Stripping. The publishers that took my book were set up by venture capitalists. A new business, set up from scratch as a venture. Not an old one broken up for the lead keel.

David W Pratt
01-13-2012, 12:13 PM
If, as one of the people in the OC&P said, the way VCs make money is to sell the company to someone, then it has to have value, so maybe the VCs do create value.
Granted, the dark side of increased productivity can be fewer jobs.

David W Pratt
01-13-2012, 12:23 PM
Good point, but the original quotation seemed to accept that supplying $$ was "work"

Steve Paskey
01-13-2012, 12:53 PM
The article is incorrect. Bain capital was BOTH a venture capital firm, AND a vulture capital firm... they did BOTH kinds of activities.

Exactly right. Bain's only goal was to make as much money as possible ... and if they could make money by acting as vultures, they were quite happy to do it.

01-13-2012, 01:48 PM
Here's one liberal who believes in markets and free enterprise. Romney spent his life getting rich.....good for him. My problem is when he tries to palm himself off as a "job creator". Like I have a problem with him faulting Obama for leaving Iraq, which they insisted on, when he spent 30 months during viet nam deferred as a missionary in FRANCE. that's right a Mormon missionary in the second most catholic country on earth. Go ahead and say what you want about Clinton but he took plenty of flak over not putting American boots on the ground in Bosnia. Start a venture capitalist.....stay a venture capitalist I say.