Published on May 17th, 2012 | by Luis Cavalcanti0
Solyndra vs. Bain, Why Obama can’t criticize Romney for his private equity involvement
Imagine with me for a second that you are a known millionaire living on the outskirts of Boston. One day you hear a knock at your door. When you open it, there is a tall handsome man standing there. In a smooth baritone voice, the man who looks like he’s just stepped out of a Calvin Klein ad begins walking you through an investment he’d like to get you to make.
“I’m with a private equity firm Bain Capital.”
You listen curiously as he explains who he is, why he’s qualified to make these investments, and why he’s come to you. He gives you thick business plans that his team has put together and carefully explains to you step-by-step how each of the investments in this portfolio is going to be turned into obscene amounts of money.
You thank him, and you shake his hand. You walk him to the door, and tell him to call you later in the week after you’ve diligently gone through the financials of the company’s he’s discussed with you.
When he leaves, you begin calling everyone you know, “I just had a young man named Mitt Romney come here with an investment opportunity. What do you know about Mitt?” People who have heard the name tell you that Mitt is an impressive guy who distinguished himself at Bain and Company, a fairly young consulting firm when he joined. But that this Bain Capital thing is new and that it has no track record, but that they think he’s competent. You look through the folder he gave you, and you really like what you see. It’s clear that Mitt and his team did their homework and have presented a very specific, statistics heavy business plan that delineates where the companies are now and how they will get them to where they want them to be in the future.
You decide to invest (risk) YOUR money. You send Mitt and his team at Bain Capital a check in the amount of $5 million. You’re rich, so you have that just kind of lying around. But the money is withdrawn from your account, and is now in the hands of this new, unknown firm. It could be disappeared tomorrow if you’ve made the wrong call.
A year later, the same young, dapper looking gentleman comes to your door to discuss another possible investment opportunity. You go get your end of the year statement. “Last year, you more than doubled my investment.”
You don’t take but two seconds to think about it; you double down. You call your accountant, and have him wire the money over instantly. You give the young man and his team all the money they earned for you plus another $10 million because they got results. Year after year, similar results are achieved, and you keep pumping money into Bain Capital. Each year, your wealth doubles. You make millions on your investments. You pay capital gains taxes only, which meant you got to keep most of your earnings.
This is the story of Mitt Romney. Bain Capital, company he led, averaged a 113% annual return to its investors. All of its investors were voluntary, and, I would imagine, most were very happy.
The media’s been criticizing Romney for his involvement in the private equity firm Bain Capital which he started with a small team of investors. If you’re not familiar with what Bain Capital is, let me give you a simple overview. Usually, what a private equity firm (like Bain) does is they look at possible investments, comb through the financials of companies that they are considering investing in, and decide whether or not a firm has the potential to turn into a big investment. A lot of these companies are small, have smart management, and want to grow. Others are growing, hit a wall, and are on the verge of bankruptcy. Based on the financials, researched market opportunities, overall possibility of the investment as a whole (which includes what the team of investors thinks they can do with the company based on their own contacts and expertise), the firm makes a decision about whether the company will be invited into the portfolio. Then, based on that research, the firm courts possible investors. To these investors, they present the opportunity. These possible investors include high net worth individuals, funds, and basically any other place one might find large pools of money. These investors decide to invest for different reasons. But more than anything, the people doing the investment, generally, have to prove that they are competent to turn an investors $10 million investment in to $50 million over the next 5 or so years. It’s not a guarantee that their money will increase, but it’s about expected outcomes and maintaining a large basket of investments.
Basically, the team of Bain investors puts money into a group of companies they think they can improve or save (or make money on in some weird, albeit legal, way). Some of these companies are going to be riskier investments, some will be less risky investments. When all is said and done, the hope is that the plan executed by the investment firm returns large amounts of profits to the investors.
Like in the imagined story above, if investors are happy, they put more money into Bain the following year. If they are unhappy, they don’t.
Occasionally, Bain’s investments go south. Sometimes they split up a company and sell it in parts (Ever seen the movie Pretty Woman?), sometimes a company goes bankrupt and Bain sells its assets to recover what it can. In those cases, people get laid off. But sometimes, companies like Staples emerge and recover the losses from the bad investments by many many multiples. To date, their success rate is about 50/50. But like I said, those wins have turned Bain Capital into a cash cow. 113% annually is incredibly impressive. A ponzi scheme, for example, generally entices investors with 20% returns.
Now, let’s put that against Obama’s obsession with rescuing companies. This administration (and to be fair, the Bush administration as well) loves the idea of throwing tax money at companies they like. The most famous of these companies are GM and Solyndra. The investments are made based on political biases, pandering to constituencies, lobbying, and polls. Obama loves to claim that he saved GM. And yet, GM hasn’t exactly repaid the American tax payer the money they were given. GM got its money because of its powerful unions. Ford didn’t take a penny. They’re doing fine and they have one of the most popular cars on the road. GM took a lot of pennies. They’re doing fine now too, even though they are building some of the most unpopular cars on the road. Sure, they broke out their company’s pension plans, but someone’s still paying them. This administration threw money at Solyndra because it occupied a particular segment of the market that the far left is obsessed with, and despite incredible negative market pressures. In fact they went under because China was undercutting them on solar panels – a fact that Obama loved to bring up when this was in the news cycle. But let’s be honest, was this a surprise? Did China start undercutting US solar panels after the investment was made? No way! China’s been undercutting us on everything we produce for years, and it’s going to be that way for a while. Maybe not forever. But for a while.
The due diligence that was done indicated to the Bush administration that Solyndra was a bad investment. The Obama administration said to hell with any due diligence, and gave the fledgling company a lot of money.
Whose money did they throw at Solyndra?
It was yours.
That’s right, Romney gambled with the money of rich people and companies who voluntarily entrusted Romney and his team to make good investments. Romney put in large amounts of his own money into Bain Capital’s investments as well. If the investments had failed, Romney and his investors could have lost everything. But that’s not what happened.
As a reward, those investors were given huge returns.
Now, a lot of Obama’s investments have gone south. Solyndra is one of many examples. Your return on investment as a taxpayer is nowhere near 113%. The difference is that in Romney’s case, if you wanted to not invest in the next fund, you didn’t have to. Try doing that with taxes. “No thanks Mr. IRS, I don’t want to pay in this year….” Try it, I dare you. In the case of private equity, the companies that investors rescue oftentimes turn into multimillion dollar firms like Staples, and others get liquidated and people lose their jobs. Aren’t those the same two results that Obama claims his tax-backed investments might induce?
“When you get new industries… it’s easy to raise money for start-ups… but if you want to take them to scale, oftentimes, there is a lot of risk involved. What the loan guarantee program is designed to do was to help startup companies get to scale. And the understanding is that some companies are not going to succeed, some companies will do very well. But the portfolio as a whole ends up supporting the kind of innovation that helps make America succesful in this innovative 21st century economy.”
First of all, it’s not easy to raise money for start-ups. That’s just a lie. It’s very difficult. You need a great team, you need a great product or service, and you need people with a lot of money to agree to throw money at you because they are confident in your product. You need huge amounts of persistence. But when you get down to it, isn’t this Obama quote basically the definition of private equity?
Obama claims that the way he manages the governments “investments” is he invests in companies that have risky business models that appear like they might be strong candidates for success. He invests in a large enough number of them to make sure that losses are mitigated by gains. You know what we call that? PRIVATE EQUITY. Obama is running a private equity firm, and he’s using the government’s money to do it.
The difference is that when Obama spends your money, that money is in the wind. You don’t get it back. Your part of Obama’s investment is lost before it’s even made. Get it? Even though he’s using your money to make the investments, you will never see a return on it.
When Romney makes an investment, his investors get paid back or lose it all. It doesn’t affect you unless you work for one of those companies that go under or you’re one of those investors who gets paid (or doesn’t get paid).
The money that Obama lost was the money of Americans who didn’t give him permission to make investments for them. We were unwilling participants in Obama’s own tax-funded version of private equity. We were forced to pay taxes. And with that money, the administration has put our money into some stinky investments that haven’t returned a penny.
So, if Obama thinks that going after Romney during this political season for his work at Bain Capital is a good idea, I think he should think twice. I don’t think that he’ll come out on top if what Obama wants to fight about is how he and Romney have invested other people’s money.