Former Clinton Secretary of Labor Robert Reich is jumping on the anti-Mitt Romney bandwagon, echoing the complaints of many one the left (and some on the right) that the companies in which Bain Capital invested didn't always succeed:
According to the Wall Street Journal, of 77 companies Bain invested in during Romney’s tenure there, 22 percent either filed for bankruptcy or closed their doors by end of eighth year after Bain’s investment. ...
The party that has repeatedly saved capitalism from its own excesses and thereby preserved capitalism is the Democratic Party. So the only serious question here is what kind of serious reforms Obama will propose when, assuming Romney becomes the Republican nominee, Obama also criticizes Bain Capitalism.
The 22% figure should not be surprising. To the contrary, recent research suggests that business failures are an inherent part of the private equity business model. A study of UK firms that went from being publicly to privately owned in leveraged buyouts by private equity firms like Bain Capital found that "companies going private have a significantly higher default probability. Private equity firms sponsoring P2P deals acquire firms with a higher risk of bankruptcy than non-acquired firms that remain public."
In turn, that finding "suggests that PE firms are not deterred by the risk of financial distress but consider it a value creating opportunity."
Private equity firms thus come to financially distressed corporations and offer to buy out the existing shareholders. Those shareholders get out from a bad situation with a premium over the market price of their shares. The newly private target corporation gets new management to replace the managers who got the company into financial trouble in the first place. The newly private target also gets access to capital from the private equity buyer at cheaper prices than an arms-length banker probably would be willing to charge (if such a banker will willing to lend to the financially distressed target at all).
Ideally, this results in a turn around that creates a stronger, more profitable company.
And sometimes it doesn't. After all, many of these target corporations were financially distressed before they were bought by somebody like Bain Capital. Typically, there are reasons firms are financially distressed. Sometimes those reasons can be addressed and solved. But sometimes they can't.
The real question thus is whether, on balance, private equity firms like Bain Capital produce more successful turn arounds than bankruptcies. Expecting there to be zero of the latter is just demagoguery.
