I have a feeling it’s going to be a theme for the next 10 months or so to criticize Mitt Romney’s role at Bain Capital. This is just raw ignorance, it shows a lack of understanding about private equity, struggling companies or capitalism in general. Unfortunately, there’s a very sad, very ironic twist to this ignorance.
Most private equity firms (and especially Bain) are setup to buy companies that are struggling to live up to their potential, help them achieve that potential, and then resell them at a profit. Before Bain was a private equity firm, they were (actually still are) a leading strategy consulting company. They only entered private equity when they realized that some companies could benefit so much from their consulting help, that they’d be better off owning the company then just collecting a consulting fee.
Weak companies, even the ones that employ hundreds or thousands are a DRAIN on the economy and ultimately lead to less jobs. I’m most familiar with software companies, so let’s think of an example from my industry. Let’s say there’s a $200M (revenue) company that’s struggling. Their management is leading them in the wrong direction and existing customers may keep them alive for another few years, but they won’t be growing with their current strategy. Say they employ 250 people, you’d think if we pull the plug on that company it would cost us 250 jobs, right?
It’s not that simple though, that company is actually costing the economy jobs. There are probably 20 or 30 extremely talented developers hiding inside that company (developers are the hottest commodity for software companies right now). These developers are currently not being put to productive use, they are chasing the misguided projects of poor management. If they were instead working for a Google, a Facebook or (even better) a startup, think how their community would be different. They would be producing valuable software for a company that would soon need more and more managers, accountants, sales people, etc… to sell and distribute that software. It probably wouldn’t be long before 250 jobs seemed like a small number. Let’s say a good developing core of 20 or 30 (with proper management) can support a company of 500, models like GroupOn suggest that number might be conservative. If we look at it that way, the dying software company isn’t saving the economy 250 jobs, it’s costing it 250.
A private equity firm like Bain Capital would buy the $200M company with 20 or 30 great developers and try to turn it in to a 500 person company. It’s true, they might fail and the company may go down anyway. But even then, they are helping the economy by forcing those 20 or 30 great developers to find companies that can more effectively use their talents.
Here’s the ironic twist. The reason private equity firms exist is that bad management is allowed to happen. Why is it allowed to happen? Because companies are democracies and sometimes democracies end up with shitty leaders. That’s right, the bad managers at the companies that Bain and other private equity firms purchase are installed in their positions by the boards of those companies which are elected by the shareholders. If the shareholders knew how to vote effective leaders for their companies then Bain wouldn’t have a business. Of course, it’s some of those same voters who are now confused about whether Mitt Romney’s work at Bain Capital was good for the economy or not.