- The Washington Times - Sunday, January 22, 2012


How much does the public truly understand about the inner working of Bain Capital Group beyond the sound bites?

Let me share my thoughts on the subject of former Massachusetts Gov. Mitt Romney and Bain Capital, and why I think it’s a Rorschach test. If you look at the model at Bain, it was a typical private-equity play and somewhere between a venture firm and a merchant bank. For example, the firm typically approached others, or was approached, to help execute a turnaround or improvement program (and, yes, sometimes this involved a leveraged buyout). In addition to offering advice, Bain generally would take an equity stake and occupy one or more board seats or, at times, have executive officers in the firm.

The firm generally uses the money of its investors to take these stakes. It is important to note here, however, that the Bain partners themselves are the largest single pool of investors - i.e. they have “skin in the game.”

What’s important about this model is that, other than a fairly nominal service fee they charge the investors, the profits of the firm are generated only when they increase the value of the firms in which they invest and cash out those investments.

Now, what else is important about this model?

First, though people want to lump this in with “Wall Street,” a firm that takes this model is not strictly a financial investor. It brings real expertise and, by working through numerous cases, gains real management experience in myriad firms across several markets. The vast majority of Bain’s clients under Mr. Romney were commercial firms, often in consumer markets, e.g. Sports Authority, Domino’s Pizza, Burlington Coat Factory, etc., not government-controlled or government-sector firms with which we’re more familiar using a contracting model.

Second, the firm’s profit is set by the market valuation of the firms, not by a committee or set of “benchmark firms” (as with a CEO) or by a “politicized market,” e.g. federal contracting. If you don’t like how much money Mr. Romney made, then your argument is not with some cabal of insiders; it’s with the market mechanism itself.

Third, turning around a firm in many cases requires cutting costs and, yes, employees. I’d compare this to pruning a shrub: If you don’t prune the excess or unhealthful parts, you can’t save the whole plant. So, yes there are instances when Bain recommended or executed job cuts, but that has to be balanced with the increased employment and shareholder returns of the successful cases. Judging by the money Mr. Romney made for himself, his firm and his investors, I’d say he was pretty efficient and effective as a manager. Mr. Romney was undoubtedly in charge, focused and organized.

I say this is a “Rorschach test” as charges of “vulture capitalism” don’t stand up to scrutiny: Bain was not a financial manipulator (like the “financial engineers” on Wall Street playing with derivatives and reinsurance), Mr. Romney’s compensation was market-determined, he put his own money at risk, and his expertise is/was evident and manifested in both private and public circumstances.

There are a lot of reasons not to vote for Mr. Romney. There are even a lot of reasons not to like him or to criticize him. His record at Bain, in my view, is just not one of them. To criticize his record there, especially in pejorative terms like “vulture capitalism” that have no meaning tells me more about the speaker (and, I think Texas Gov. Rick Perry coined the term: ” ‘Nuff said”) than about Mr. Romney.

I just wanted you to have the full explanation of my recoil at the use of the term. I think this also goes a long way to explaining the opprobrium being visited on former House Speaker Newt Gingrich and Mr. Perry by the party for taking this tack.

Armstrong Williams, author of the 2010 book “Reawakening Virtues,” is on Sirius Power 128 from 7-8 p.m. and 4-5 a.m. Mondays through Fridays. Become a fan on Facebook at www.facebook.com/arightside, and follow him on Twitter at www.twitter.com/arightside. Read his content on RightSideWire.com.