Update: Romney Tax Plan and Economics: My Days at Bain & Company with Mitt Romney

I began my working career after college at Bain & Company as a research associate. In fact, I was hired by Bain in 1984, the very same year in which Mitt Romney was tapped by Bill Bain, the company founder and CEO, to head up the new Bain Capital unit.

Bain & Company is a management consulting firm. Companies hire Bain to improve their business operations.

It has been said that a consultant is someone you hire to look at your watch and tell you what time it is. I certainly observed that many of the things that companies hired Bain to do for them were things that companies could do for themselves. But, so often, companies didn't do those things and Bain could significantly improve most companies.

The Bain approach was primarily to analyze the three ‘C's which were customers, costs and competitors. The firm addressed issues such as:

• Customers: What are their attributes and what is it important to them in their purchasing decision?
• Costs: What is the cost (and profitability) for each product and service that a company offered? Many companies with diverse product lines failed to track this information.
• Competitors: What companies sell similar products and what were those competitors' strengths and weaknesses?

Over time, more and more companies created in-house strategic planning units that would do this kind of analysis rather than hiring a consulting firm. It's been a number of years since I worked at Bain so I can't tell you how their consulting approach differs today.

Bain Capital and Mitt Romney

Down the hall from where I sat as a research associate at Bain & Company was Bain Capital. It started up the year I began at Bain and their nook at Bain at that time was quite modest. They had a handful of employees but grew quickly. A number of my peers who were recent college graduates worked as research associates at Bain Capital. While I didn't work with these folks on a regular basis, I interacted with them extensively and went to lunch with them. I saw Mitt Romney on a near daily basis when he was in town.





Romney was widely regarded as a hard working, intelligent, ethical business man. While those of us who worked on the consulting side of Bain put in long hours, I remember the Bain Capital folks mostly being in the office when I arrived in the morning and still being there when I left in the evening.

The vast majority of the charges being leveled against Romney and his Bain Capital work are off base and largely reflect the business ignorance (and agenda) of those making them. Romney and his fellow private equity workers are being called "vulture capitalists" and have been accused of "looting" companies.

Bain Capital was begun by Bain & Company, the consulting firm which employed me at the time with a simple premise. Bain consulting was adept at improving and expanding businesses. So, the partners at Bain wanted to "put their money where their mouth is" and actually invest in businesses that they thought could be improved and expanded using their business insights and approach. There was nothing untoward or unethical about what they did.

As evidenced by the fact that Bain Capital today is a $66 billion business (shocking to me since I saw their first employees hired), many folks think the firm is a top drawer outfit. In addition to investing money of its own partners/directors, the firm invests money on behalf of college and other leading non-profit endowments, foundations, insurance firms, pension funds, sovereign wealth funds, high net worth individuals and other institutional investors. And, consider this: numerous labor unions invest in Bain Capital funds so what Bain Capital does must not be so awful and anti-employee and anti-jobs!

Bain Capital's recent investments are in wide variety of industries. Examples of companies in which Bain Capital has made investments over the years include AMC Entertainment, Bright Horizons, Brookstone, Burger King, Burlington Coat Factory, Clear Channel Communications, Domino's Pizza Japan, Dunkin' Brands, Gymboree, Hospital Corporation of America, Sealy, Sports Authority, Staples, Toys ‘R' Us, Warner Music Group and The Weather Channel.

Business Competition

The business world is an incredibly competitive place. The most successful and dominant companies cannot rest on their laurels. Success and large profits always invites competitors to replicate and go after your market.

Failure and downturns are part of the business landscape as well. Companies that fail to adapt, better meet customer needs and manage their costs suffer the consequences in lost business which compels firms to scale back employment. And, some companies literally fail and go out of business.

When you invest in stocks, you expect that companies are doing their best to grow and improve the profitability of their businesses which can boost a company's stock price higher. 

Private equity firms like Bain Capital make substantial investments in companies. Sometimes they are attracted to companies that have enormous growth potential. In other cases, they are attracted to companies that haven't been particularly well run and require a turnaround. In a classic turnaround, dramatic changes are often called for which can include reorganizing, layoffs and sale of unproductive units and assets. Investors in Bain Capital's funds have the same goals that you do when you invest in stock - they want the enterprise to succeed and thrive which is reflected in a higher stock valuation.

This is what capitalism is and that's what creates jobs. Just as even the best investment managers don't have perfect track records regarding the success of stocks in which they invest, Bain Capital certainly didn't have a perfect track record either. Sometimes, turnarounds didn't pan out and companies ultimately went under and employees lost jobs. But, far, far more often than not - Bain Capital succeeded and the companies in which they made substantial investments became healthier, grew, increased profits and hired more employees.

Jonathan Macey, a professor of corporate law, corporate finance and securities law at Yale Law School, just wrote a column for the Wall Street Journal premium content section sharing his insights on the industry. Here are the highlights:  
 

"Private-equity firms make significant investments in companies, mainly U.S. companies. Most of their investments are in companies that underperform industry peers. Frequently these firms are on the brink of failure.

Because private-equity firms are, by definition, equity investors, they make money only if they improve the performance of their companies. Private equity is last in line to be paid in case of insolvency. Private-equity firms don't make a profit unless their companies can meet their obligations to workers and other creditors.

...Private-equity firms not only help corporate performance, but in the long run they lead to more employment and higher wages as well. The alternative to the leaner, smaller firms created by private equity are bankrupt firms that do not employ anybody. And private-equity firms tend to use more incentive-based pay than other firms. A 2008 Government Accountability Office (GAO) report shows that the companies in which private-equity firms invested had low employment growth relative to their peers, and their employment growth rose after they were acquired by a private-equity firm.

...Unlike some other investors who trade in debt and derivatives, private-equity firms make money by investing in businesses that make things and provide services. This industry should be applauded, not attacked.

Assaults on the private-equity industry really are attacks on economic freedom, because the private-equity process is nothing more and nothing less than free-market capitalism at work..."

 

Update May 23, 2012: The private equity industry, in which Mitt Romney worked for numerous years, is back in the news as the Obama campaign has released numerous videos attacking the industry. In the first video below put out by a pro-Obama PAC, there is a compilation of attacks that losing Republican candidates made on Romney's work in the field. More than anything else, these politically motivated statements show the profound ignorance of what private equity firms really do.





The Romney campaign put out their own compilation (video below) of leading Democrats praising private equity and saying that the attacks are misguided. These statements are accurate. Please see my original article below for an inside perspective on my observations of Bain and their work in private equity.