Prospectus: Bain Capital vs. Obama, Inc.

Investors have been hearing a lot about two major organizations lately, Bain Capital and Obama, Inc.  A former employee of Bain, Willard Mitt Romney, is looking to take over Obama, Inc.  His experience at Bain Capital has become a highly controversial item on his resume.  It therefore seems prudent to compare the records of the two organizations in some key areas:

Financial performance.  Bain Capital has grown considerably, both during and after Romney’s tenure.  As the Wall Street Journal recalls, it began with a $37 million trust fund in 1984, and manages $66 billion today.  Its investors include “college endowments and public pension funds that have increased their investments in private equity to get larger returns than stocks and bonds provide.  The people who benefit from those returns thus include average workers.” 

An earlier Journal analysis found that Bain produced 50 to 80 percent annual gains for investors during the Romney era, which “experts said was among the best track records for buyout firms in that era.”  Matthew Rees of the American Enterprise Institute published an even more glowing assessment of Romney’s performance in 2006, praising his willingness to “pursue – and analyze – data that others wouldn’t bother to chase down”:

During the 14 years Romney headed Bain Capital, the firm’s average annual internal rate of return on realized investments was a staggering 113 percent. At that growth rate, a hypothetical $1,000 investment would grow to $39.6 million before fees. Few, if any, VC firms have ever matched Bain Capital’s performance under Mitt Romney.

Although the intention here is to focus on Bain Capital, it should be noted that some of Romney’s management efforts outside the company have enjoyed rather less spectacular results.  Strangely enough, no one seems interested in criticizing him for those efforts any more, even though they are more immediately relevant to the new position he wishes to secure.

None of those dismaying results measure up to the catastrophic failure of Obama, Inc.  Its budget is… pardon me, let me back that up a bit.  It doesn’t have a budget, and has not had one for nearly 1000 days.  It spends over a trillion dollars more than it takes in, every single year.  That’s an annual loss of over 30 percent!  It finances these losses by borrowing absolutely gigantic amounts of money.  This year, its borrowing actually exceeded the total output of every single corporation in the United States.  Its total debt is now over eight times its annual income.

To be sure, these conditions were developing long before the current management team moved in, but they have made the situation dramatically worse by every objective measure.  Debt is up, spending is up, and the transparency of operations has declined radically.  The CEO routinely flaunts long-standing company policies to pursue his agenda.  If Obama, Inc. were subjected to even the most cursory financial audit – far simpler than what Bain Capital is routinely expected to face – the entire management team would be heavily fined, and probably imprisoned.

Operational performance.  Here we come to the meat of the criticism lodged against Romney.  Not all of the operations taken over by Bain Capital – which is involved in both start-ups and buyouts, although the buyouts are a much larger portion of its business – have fared terribly well. 

To be sure, Romney enjoyed some fantastic successes.  One of his start-ups, Staples, is now the largest office products company in the world, creating over 90,000 jobs.  On the other hand, four of the ten most profitable Bain acquisitions later ended up in bankruptcy.  Then again, some of Bain’s bankrupt companies emerged from reorganization successfully. 

When contemplating Bain’s operation record, investors should keep in mind that it was deliberately searching for troubled companies to buy.  That was its business model – buy low, improve, sell high.  Seek out risk in the hope of reward.  That is almost everyone’s business model, really, but the amount of risk accepted, and the methods used to develop profit, differ wildly from one venture to another. 

The Wall Street Journal pored over reams of data and concluded that the five-year bankruptcy rate for “bankruptcies and closures occurring by the end of the fifth year after Bain first invested” was 12 percent.  Is that good or bad, considering that most of these companies were in bad shape when Bain got involved?

By contrast, the operational performance of Obama, Inc. is an absolute and unmitigated disaster.  $500 million investments have routinely vanished into disastrous bankruptcy.  Nearly every company Obama, Inc. touched is a failure.  Its most highly touted “success,” General Motors, lost investors a grand total of $38.6 billion on an (ahem) “investment” of $60 billion.  Hundreds of millions in additional funding were pumped into this operation to produce a toy electric car purchased primarily by people with six-figure incomes, which had to be recalled because it had a tendency to burst into flames.

The average cost of each job created by its highly touted “green energy” initiatives is between four and five million dollars per job.  Some specific “investments” ended up spending $20 million per job created.

Investment prospects.  Keep in mind that only investment in Bain Capital is optional.  You are already an investor in Obama, Inc.  You cannot recover your losses, or separate your portfolio from the organization.  Consequently, the management is not much concerned what investors think of its activities, and is attempting to use force to secure further investments to fund additional projects.  Obama Inc. is not even slightly concerned with its gigantic operational losses or astonishing levels of debt, and in fact the management will become very angry if these topics are brought up by shareholders.

If you have your own company, and are considering a partnership with Bain Capital, you should bear in mind that they might interfere in your operations and require the termination of some employees.  Obama, Inc. already considers itself a partner in every business in America, and has driven nearly two million people out of the workforce since the current CEO took over.  The total unemployment rate, celebrated for dipping slightly from 8.7 to 8.5 percent last month, would currently be 11.6 percent if the workforce was the same size as in 2009.  That is the highest unemployment rate in 70 years.

In summary, investors are free to tell Bain Capital to get lost if they don’t like what it’s doing.  Few of them appear to have done so, but the constant threat seems to have influenced its behavior considerably, along with the outlook of former employee Mitt Romney.  The man Romney would like to replace has never held a job he could be fired from, or run an enterprise that could “fail,” and this seems to have influenced his outlook, too.