Let me make this clear from the start: Mitt Romney is not my favorite candidate. As I state in this post, his Iranian policy is seriously misguided. And as I write here, I think he will make a disappointing president in many ways. He will be weak on civil liberties, he will compromise all of the time on important issues and he will engage in needless sabre-rattling and perhaps war. So, please do not think I am not aware of Romney’s many short-comings.
But all of the criticism coming from Democrats and Republicans about Romney’s years at Bain is completely lame. If you criticize what Romney did, or criticize his performance at Bain, you simply have no clue about how the modern-day world works. Or to put it a bit more charitably, perhaps you have not thought about it carefully enough. Perhaps this post will help you understand things a lot better.
Let’s start with some basics. Everybody reading this thinks iphones and other gadgets like ipads and ipods are good, right? How does the iphone get invented? Well, it turns out that there is a company called Apple that made them. So, all corporations cannot be bad because this particular corporation turns out a pretty good product that a lot of people like. Apple sells stuff and it also does research for new products and improvements on existing products. A large part of the money that Apple makes is plowed back into the company for research purposes so Apple can make cooler and cooler products. This is called private investment capital.
Can we agree that investment capital is not a bad thing if it is used to build iphones? I hope so. Keep on reading for more.
Now, let’s suppose that Apple has a serious money problem like it had before Steve Jobs came back. (Remember, Apple was close to going out of business before Steve Jobs was called back to rescue the company). If Apple wants to spend money inventing something new, and it does not have enough money, it can do this in several ways. It can go to the bank and ask for a loan, but sometimes banks charge high interest rates. It can offer more public stock (but this dilutes shares outstanding, and a company that is suffering usually cannot raise money this way). Or it can go to companies that provide private equity.
Now what are private equity companies? These are companies run by very smart people who raise money to invest in struggling or new businesses where you may get a return. They may offer to buy out the struggling company. Or they may invest money in the company in exchange for an ownership percentage. If these private equity companies make such investments, they expect a return on their investment. They will ask that the company they invested in use a good management team approved by the investors.
Let’s use a small example. Let’s say you own a small flower shop that you have owned for many years. You are interested in expanding and buying another flower shop in another city, but you are not sure how to do it. You don’t know what kinds of permits you may need in that city, and in fact you don’t have enough money for the expansion. But you feel it would be a good investment. So, you decide to go to your Uncle Leo. Uncle Leo has some money in the bank but he also has some friends who may want to invest. Uncle Leo says he will invest if he gets half of the profits from the new store. He also wants to buy you out in five years when you are ready to retire. You get to keep half of your profits, which is better than zero, so you say yes. You also have a way of retiring now with a guaranteed buyer. You draw up a contract, and off you go.
Bain Capital (where Mitt Romney worked) is like Uncle Leo: both of them want to make a profit. But Uncle Leo is also doing something good for you because you wouldn’t be able to open the second store otherwise. But he is also doing something good for the entire economy. You open a second store, and you hire more people. An empty store front now becomes a business. People make money and get better services. Uncle Leo’s investors make money and they invest it in other businesses. Everybody is happy, and the economy thrives when there are a lot of Uncle Leos out there making investments.
Now here is the reality of Uncle Leo’s business and Bain’s Capital’s business: there is no guarantee that your new store will be profitable. So, Uncle Leo needs to invest in many businesses. He knows they won’t all succeed. But if he can make 10 investments, and if half of them are profitable, and two or three of those are really, really profitable, he is doing great for his investors.
This is what Bain Capital does: it invests in a lot of companies. Sometimes it buys them, builds them up and then sells them for a profit. Some of the companies succeed, some of them don’t. But while Mitt Romney was there, Bain Capital was really, really successful. To sum up the results of a Wall Street Journal investigation: “Overall, Bain recorded roughly 50 percent to 80 percent annual gains in this period, which experts said was among the best track records for buyout firms in that era.” Some of the companies that succeeded because of Romney’s efforts include: Staple’s, Domino’s Pizza and The Sport Authority.
Mitt Romney was very good at getting good returns. This was good for the investors. It was also very, very good for the economy. This means jobs for poor and middle class people. This means advancement, happiness and equality of opportunity. This is very important to understand: you can’t create new jobs and new products without new investment. Apple Computer created new jobs and new products because of investment. Somebody had to come up with the money for the new products. When Uncle Leo provides you the money to open a new store through his private equity firm, he is making an investment that ultimately helps other people by providing employment and opportunity.
Ultimately, this is what Mitt Romney was doing: providing money that helped invent new jobs and new opportunity. Did he create 100,000 jobs as he claims? I have no idea, but there is no doubt he created a lot of new employment that would not have existed otherwise.
Again, not all of Bain’s investments — or Uncle Leo’s — will be successful. Sometimes a product doesn’t work for the times. If you want to sell millions of buggy whips, you would be successful in 1890. But these days, there are simply not that many buggies, so there is not a demand for buggy whips. So, in some cases people will be laid off after Bain invests in companies. We have two alternatives: 1)we keep failing, unprofitable companies around forever, with employees sitting at their desks or on assembly lines doing absolutely nothing, producing nothing and ultimately being miserable or 2)We let the companies fail. in the second case, the workers will almost always find new jobs and will be productive and happy in new jobs. It is no fun to be laid off, but the alternative is much, much worse. Criticizing Mitt Romney because some of his companies failed is simply stupid. Have 100 percent of the things you have done been roaring successes? How about your 401k? Is it increasing 40 percent a year every year?
The reality is that Mitt Romney had to close only 22 percent of the businesses he invested in, which is an incredible track record, really sterling for this business. Don’t trust me, ask Jack Welch, former CEO of GE, who says Romney’s record is stellar.
My final point: if you still think Mitt Romney should be criticized for his record at Bain, you agree with Rick Perry and Newt Gingrich, two of the most absurd politicians of our generation. I rest my case.