“For people not familiar with Romney’s background as the owner of Bain Capital or with his relationships to other private-equity firms, the irony of this advice might not have been immediately clear. PE firms during the 2003—7 buyout boom often had their companies use increased short-term earnings that came from reducing customer service, raising prices, and starving them of capital—not to reinvest or pay debt, but instead as the basis to borrow more money, which they then gave to their PE owners through dividends. Many of these businesses are now stuck with enormous debt and falling earnings.”
“Mitt Romney was a pioneer of this strategy. His private-equity firm, Bain Capital, was the first large PE firm to make a serious portion of its money not from selling its companies or listing them on the stock exchange, but rather by collecting distributions and dividends, which in this context is the exact opposite of reinvesting in a company. Bain Capital is notorious for its failure to plow profits back into its businesses.”
“Traditionally, cash-rich public companies have paid dividends to lure and reward investors. They distribute some of the profits that they are not reinvesting as a way to say they have surplus funds and expect to have them in the future. These dividends generally amount to cents or a few dollars per share paid quarterly. But when private-equity firms take distributions, they typically do not tap excess profits. Instead, they increase the pool of available funds by having their companies borrow money—on top of the original debt taken on to finance the LBO.
Mitt Romney used this strategy in the 1990s as part of his private-equity playbook, long before it became common practice during the 2003—7 buyout boom. The credit crisis that started in mid-2007 limited the practice, as it became difficult for companies to borrow funds to pay the dividends. But the scale back was purely a function of credit availability, not of any backing off by the PE firms. Just as venture capitalists rushed to get their businesses listed on the public markets in 1998 and 1999 to take advantage of the IPO frenzy, private-equity groups used dividend payments in this decade as a way to profit from the cheap-credit bubble. If Bain’s experience is any indication, many of the companies that borrowed money to issue dividends will not be able to survive.”
Thanks, that’s great information. It pretty much explains that the primary loophole Romney and co. found was cheap, easily available credit. I have some questions though.
How does Bain escape liability in the bankruptcy? Is it like the stuff I hear on the radio where once you declare a business those funds are separate from your personal funds? Was Bain safe because the companies they bought were still declared as separate companies from Bain itself?
Why was credit so readily available even though this appeared to be a pattern for Bain that creditors should have recognized? Or is there some sort of you-scratch-my-back deal going on here?
Have any of the recent financial regulations done anything to prevent this from happening again in the future if the PE firms can get the credit?
Do we have any knowledge of who absorbed the losses from the bankruptcies? Did any of these lenders eventually go under or get bailed out by the government through FDIC or TARP?