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Fact or Fiction? Romney's private equity past

December 13, 2011: 3:01 PM ET

Updated 1/23 Mitt Romney is running for president as a "job creator," based on his time as a venture capitalist and private equity investor at Bain Capital. Some of his rivals are beginning to accuse Romney of being more of a job destroyer, citing some of Bain's more troubled investments.

So we've decided to keep track of who is saying what about Romney's tenure at Bain, and about private equity in the context of presidential politics. More importantly, we're going to tell you if the statements are true, sort of true or false.

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Joe Klein: Private equity "salaries"

Joe Klein has a post up on Time's Swampland blog titled The Trouble with Private Equity. It's got two major problems.

First, Klein writes that the carried interest tax loophole loophole "enables private equity-mongers to have their salaries taxed at the capital gains rate of 15%, rather than as earned income." This is FALSE. Private equity "mongers" pay ordinary income rates on their actual salaries, which are paid whether or not a firm's investments are successful. The carried interest is on profits from successful investments.

Klein then writes that PE-backed corporate "executives have become obsessed with short-term profits rather than long-term growth." I'm not going to say this is true or false -- since each case is different -- but it certainly is a misunderstanding of the private equity model. A big reason why CEOs help take their companies private is because they can focus on the type of long-term growth that is discouraged by investors in public companies. Private equity investors are okay if a portfolio company shows a quarterly loss because of some long-term investment. Public equity investors (particularly hedge fund managers), on the other hand, will have a CEO's head for that very same result.

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Romney: Ampad didn't go bust on my watch

During Monday night's debate in South Carolina, Romney was asked about Bain Capital's investment in American Pad & Paper (Ampad). Here was part of the exchange with moderator Gerald Seib of the Wall Street Journal.

SEIB: America Pad and Paper is a company that Bain Capital bought with $5 million, took on more debt to expand, couldn't pay back the loans, went bankrupt and several hundred people lost their jobs.
Bain Capital though, took $100 million in profits and fees. Does that show a flaw in the Bain Capital model? Or is that just the rough and tumble of America capitalism?

ROMNEY: Well, first of all you never want to seen an enterprise go bankrupt. And you never want to see anyone lose a job. At the time I was at Bain Capital, the business was still going and didn't go bankrupt.

It is TRUE that Ampad did not go bankrupt while Romney was still at Bain Capital. He left the firm in 1999, and Ampad filed for bankruptcy in 2000. Moreover, Ampad remained in business throughout the bankruptcy through to today (albeit with different owners). That said, it's also worth noting that Bain first invested in Ampad in 1992 -- and generated most of its profits from the investment -- when Romney was still with the firm.

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Video: When Mitt Romney Came to Town

Winning Our Future, a political action committee supporting Newt Gingrich, today released a 28-minute video titled "When Mitt Romney Came to Town." It focuses on the failures of four companies formerly owned by Bain Capital, and is so chock full of errors that it deserves its own post. Read it here.

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National Review: PE firms borrow money

Conservative publication National Review today has a full-throated defense of Mitt Romney and his tenure at Bain Capital. It's a fairly decent overview, except for the following line:

Bain is involved in, among other things, leveraged buyouts, meaning that the firm and its investors borrow money from banks to acquire companies, usually firms that are in trouble but believed to be salvageable.

This is FALSE. Private equity firms do arrange bank financing for their acquisitions, but the firms themselves are not the real borrowers. Instead, the debt is secured against the acquired company's assets -- which effectively means that the company itself is the debtor. For example, let's imagine that Bain purchased a company for $1 billion. Of that, Bain might put up $300 million in equity. The remaining $700 million comes from banks. Were the company to immediately collapse, the most Bain and its investors could lose would be $300 million.

It also is worth noting that National Review completely ignored the issue of dividend recaps, which is the real issue that keeps getting glossed over because it doesn't fit into a 30-second soundbite. Dividend recaps are when a private equity firm raises even more debt for an existing portfolio company, and then takes a dividend out of the debt proceeds (rather than from profits). That is how a private equity firm can profit on an investment whether the company later thrives or fails (although, typically, dividend recaps alone do not generate the type of returns that PE firms promise their investors).

When the extra debt is raised, the company is typically believed to be solvent (otherwise why would banks still lend). Sometimes, however, such companies later fail and cite their heavy leverage load as a contributing factor. That is why Romney and Bain Capital are sometimes accused of profiting from bankrupting companies, even though that's really some sloppy shorthand for what actually happens.

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Mitt Romney: "Net" jobs created

During Saturday night's New Hampshire debate, Mitt Romney again claimed to have helped create "over 100,000 jobs." As we've discussed before, this is a figure that cannot be confirmed because Bain Capital never kept portfolio payroll data. Last week, a Romney spokesman said the number was calculated from three companies -- Staples, Sports Authority and Domino's -- in which Bain had invested (including jobs created after Romney left), not a net number that included all job creation and destruction during Romney's tenure at Bain.

So when Romney again made the claim on Saturday night, moderator George Stephanopolous interjected. Here was the exchange:

ROMNEY: But in the business I had, we invested in over 100 different businesses and net-net, taking out the ones where we lost jobs and those that we added, those businesses have now added over 100,000 jobs. I have a record of learning how to create jobs...

STEPHANOPOULOS: Now, there have been questions about that -- that -- that calculation of a hundred thousand jobs. So if you could explain it a little more. I -- I've read some analysts who look at it and say that you're counting the jobs that were created but not counting the jobs that were taken away. Is that accurate?

ROMNEY: No, it's not accurate. It includes the net of both. I'm a good enough numbers guy to make sure I got both sides of that.

This is FALSE, based on the campaign's own prior assertion and Bain's lack of relevant book-keeping. To be clear, it is indeed possible that Bain created more than 100,000 net jobs, depending on how you define "created." But no one knows for sure, including Romney. So for him to state it as fact is false.

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MSNBC: We are partners with Bain

MSNBC has begun noting the relationship between its parent company and Bain Capital, when discussing Romney's business resume. As MSNBC host Ed Schultz recently said:

"We want to disclose that NBC Universal and Bain Capital are each a part owner of the Weather Channel."

The disclaimer is TRUE, as NBC and Bain teamed up with The Blackstone Group (BX) to acquire Weather Channel in 2008 from Landmark Communications for $3.5 billion. Romney was no longer working at Bain at that time, but does still have an indirect financial stake in the Weather Channel investment.

It also got us to looking to see if any other major media outlets have ties to Bain, and came up with one. Bain Capital Ventures participated in an $8.6 million investment for Internet radio advertising network TargetSpot in March 2008. Early last year, Bain re-invested as part of an $8 million follow-on financing that also included CBS Radio. To date, no CBS journalist seems to have issued a disclaimer similar to that of MSNBC.

We did not find any active investment relationships between Bain and Walt Disney Corp., News Corp., Time Warner, The New York Times Co., AOL or The Washington Post Co.

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Scott Pope: "He broke apart the business"

The Jon Huntsman campaign set up a media call with New Hampshire supporters, including former Claremont, N.H. mayor Scott Pope. The subject was about a photo album manufacturer called Holson Burnes Group, which Romney's Bain Capital formed in 1992 by acquiring one company and merging it with an existing portfolio company.

On the call, Pope said:

"I was shocked at the realization that someone who's running for president was part of something that would close down a plant, and people would lose jobs... [Romney] did close down the plant and broke apart the business."

We mark this as SORT OF TRUE, given that while the layoffs did happen, the business itself wasn't actually broken up.

The original company Holson was based in Rhode Island, while the add-on Burnes was based in Boston. Bain then shifted the focus of operations to a new manufacturing facility in South Carolina, before shutting that down and relocating to New Hampshire (meaning Bain was responsible for creating the jobs it would later destroy). That facility too would disappear, as Bain began outsourcing most of the Holson Burnes jobs (although a Rhode Island shop remained). Bain would ultimately sell Holson Burnes in 1996 to Intercraft.

As an aside, there is some irony in the Huntsman campaign criticizing Bain Capital deals. Huntsman's father, Jon Huntsman Sr., is co-founder of a private equity firm called Huntsman Gay Global Capital. The eponymous "Gay" is Bob Gay, one of Romney's former Bain Capital colleagues.

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Tom Conway: Romney can't use Steel Dynamics

During a media call discussing Romney's history with the steel industry, United Steelworkers International vice president Tom Conway said the following in response to a question from Reuters about Steel Dynamics (STLD):

"When you look at Steel Dynamics, [Bain' got out of it relatively quickly... It's been a long time since Bain, Romney and those people have been around Steel Dynamics. Steel Dynamics' growth has come without Bain's involvement so it's kind of like taking credit for something you may have been involved with a long, long time ago. But the growth and success of Steel Dynamics, it's kind of disingenuous for Romney to say he's part of that."

This is a FALSE statement. Bain Capital sponsored the formation of Steel Dynamics in 1993, and still maintained over a 13% stake when the company went public three years later with nearly $175 million in revenue. If it was there on Day 1 and still there when Steel Dynamics went public, it obviously was a part of the company's growth and success.

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Mitt Romney: The GS Industries investment

During his Dec. 18 interview on Fox News Sunday, Romney had the following exchange with host Chris Wallace:

WALLACE: Let's pick up on Bain where you worked for 25 years, and you said that's what sets you apart. You have worked in the real private sector and you have created jobs. There have been some big successes, Staples, now you helped start it. They now employ 90,000 people. On the other hand, we saw that four of the 10 top dollar investments you made went bankrupt. Is that just the cost of doing business?

ROMNEY: Well, it's not just a cost. It's the downside. It's the reality of what life is like in the private sector, which is that businesses that you invest in -- and those are not enterprises that I ran, of course.

WALLACE: No.

ROMNEY: But in businesses that you invest in --

WALLACE: GS Industries, Dade International.

ROMNEY: Right. And a company like GS Industries was a group of steel mills and I think we were an investor in that business for, I don't know, eight years or so. It finally went bankrupt after I left the firm. It was an investment that was made. Again, I wasn't running it.

But the steel industry got in trouble in this country. I think 40 mills went bankrupt the same time it did, in part because of -- well, in this case, dumping from places like China into this country.

I understand the impact of what happens globally in trade. And businesses, you know, lose and go out of business, and in some cases, lose jobs. It breaks your heart when that happens. It also loses investment.

And by the way, you probably know this -- the dollars in Bain Capital weren't my dollars. They came from endowments and even a church, a pension fund was -- not my church, was invested in Bain Capital and that money goes to them. When we suffer the losses, they're the ones that suffer the losses as well.

Romney packed a lot into this answer, some of which is true and some of which is, at best, disingenuous. So we mark this SORT OF TRUE.

First, Romney is right Bain was invested in GS Industries for eight years, and that it went bankrupt around two years after he left the firm. Romney also is correct that he wasn't personally "running" GS Industries. At the same time, however, Bain certainly had control of GS Industries -- a company Bain actually created in 1993 via the purchase and combination of several different steel mills.

Romney also suggests, although does not explicitly say, that Bain Capital's investors lost money on GS Industries. That's simply false. Bain made a profit on GS Industries via dividends. The deal certainly would have been worth more had GS Industries not gone under, but that's not equivalent to a loss.

Finally, I have no idea why Romney said "the dollars in Bain Capital weren't my dollars." Most of the dollars weren't his, but some of them certainly were (as we discussed below in the David Axelrod "other people's money" comment).

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Mitt Romney: Understanding the "real world"

Romney was asked to comment on Gingrich's attacks on his record at Bain Capital, and if he would be "vulnerable to that kind of attack" in a general election. Romney's full reply:

"I think it's a great opportunity for us. Because I think the president is going to level the same attack. He's going to go after me and say, you know, you -- in businesses that you've invested in, they didn't all succeed. Some failed. Some laid people off. And he'll be absolutely right. But if you look at all the businesses we invested in, over 100 different businesses, they added tens of thousands of jobs.

In -- in the real world that the president has not lived in, I -- I actually think he doesn't understand that not every business succeeds. That not every entrepreneur is lucky enough to do as well as the entrepreneurs that I described at Bright Horizons and Staples and that steel company and many, many others. I myself have had the chance of leading four different organizations. Each of those was highly successful, in part because of hard work and in part because of good luck.

In the real world, some things don't make it. And I believe I've learned from my successes and my failures. The president I'll look at and say, Mr. President, how -- how did you do when you were running General Motors as the president, took it over? Gee, you closed down factories. You closed down dealerships. And he'll say, well I did that to save the business. Same thing with us, Mr. President. We did our very best to make those businesses succeed. I'm -- I'm pleased that they did and I've learned the lessons of how the economy works. This president doesn't know how the economy works. I believe to create jobs, it helps to have created jobs."

This is a strong rebuttal of attacks on Romney's record at Bain, and on private equity in general. But there are a few flaws, which is why we give it SORT OF TRUE. First, Romney cannot honestly claim that Obama "doesn't understand that not every business succeeds," when Romney has repeatedly hammered Obama over the failure of Solyndra. Moreover, it is important to note a major distinction between the government bailout of General Motors (GM) and some of the Bain-backed failures for which Romney is criticized: Were GM to have failed following government intervention, the government would not have profited from the transaction. This is different than some of the situation with Bain, which profited on failed investments via the use of dividend recaps.
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Mitt Romney: Obama is a "venture capitalist"

In response to a Twitter question about industries that will create jobs over the next decade, Romney said the following:

"The great thing is, the free market will decide that. Government won't. And we have in a president someone who, again, doesn't understand how the economy works and thinks that, as a government, he can choose, for instance, which energy sector is going to be successful. So he invests as a venture capitalist in certain car companies that have electric battery power, not understanding that perhaps Toyota and G.M. could do a better job than Tesla and Fisker. The president decides to go into Solyndra because he thinks that solar power is going to be the future. Look, let markets determine what the future course of our economy will be."

If anyone should know how venture capital works, it should be Mitt Romney. After all, Bain Capital began life as a VC firm, before expanding into leveraged buyouts. Obama's actions in regards to alternative energy companies is not venture capital, because venture capital involves the investment of equity. Department of Energy loans, on the other hand, are just that: Loans (i.e., debt financing). So Romney's claim is FALSE.

Two other notes: (1) While DoE loans did not go to the two incumbent automakers Romney cited (Toyota and GM), they did go to both Ford Motor Co. and Nissan. (2) DoE's loan program did finance numerous solar projects. But it also funded wind projects, nuclear, geothermal, biofuel, batteries and traditional electricity generation.

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David Axelrod: "Other people's money"
Obama's senior campaign adviser made the following claim about Romney's time at Bain Capital, during a Dec. 13 briefing for reporters: "Generally his practice has been to bet other people's money, not his own."

This is FALSE. Private equity firms like Bain Capital make investments out of closed-end funds that are mostly raised from third-parties (university endowments, pension funds, wealthy individuals, etc.). But senior firm management also is expected to make fund commitments, in order to better align interests. That means that every time Bain Capital invested "other people's money," it also was investing Romney's money. In fact, that's still the case as Romney maintains personal exposure to dozens of Bain Capital funds (according to this filing with the FEC).

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Newt Gingrich: Give back the money
After Romney suggested Newt should return money earned for working on behalf of Freddie Mac, "I would just say that if Gov. Romney would like to give back all of the money he's earned from bankrupting companies and laying off employees over his years at Bain, that I would be glad to listen to him."

It is true than some of Bain Capital's investments went very poorly, including bankruptcies. And it is true that, in some cases, Bain Capital actually profited off of investments in companies that later went broke (via a noxious piece of business called the dividend recap). Finally, private equity firms like Bain often lay off employees upon acquisition, often because they feel the company was too bloated to begin with.

The reason we give Gingrich only a SORT OF TRUE, however, is that Bain did not directly earn money from bankrupting companies or laying off employees. It's not as if Romney pocketed paychecks of laid-off workers. In most cases, bankrupt companies lose money for private equity firms (since the equity gets wiped out). So do companies that shrink in size. The bulk of Bain's returns -- like that of most private equity firms -- comes from increasing a company's value (and then selling it or taking it public).

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Mitt Romney: We created 100,000 jobs

Romney often defends his time at Bain by claiming that the firm was more of a job creator than job destroyer. In New Hampshire on December 12 he said: "You try to encourage the more successful - and fortunately for many people tens of thousands of jobs, actually over 100,000 jobs, were created through the investments that we were able to help make."

This is SORT OF TRUE, in that we have no idea if it's true of not. Bain Capital has said that it does not keep records of jobs created or lost at the companies in which it invests. And the Romney campaign has never provided a detailed accounting of those 100,000 jobs, or said if that 100,000 is net of the jobs lost at Bain Capital portfolio companies.

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Ken Langone: "The state funds"

Home Depot co-founder Ken Langone said the following while guest-hosting CNBC's Squawk Box on Nov. 22"

"We were talking about Mitt Romney and Bain. Bear in mind where most of the money comes for these private equity deals... It comes from the state funds... And there's nothing wrong with that, it's a great investment vehicle. But when you start talking about how they succeed, they succeed by rationalizing and managing businesses better... This article in the Times last week about how he made all this money, 80% of that money went to the State of Washington, the State of Oregon. Who did it go to? To the pension fund."

Langone's statement is FALSE.

First, let's stipulate that the typical private equity fund distributes the majority of investment profits back to its underlying investors (which often include state pension systems). That means that Romney and his partners at Bain Capital only received a fraction of the winnings from their successful deals. And Langone probably asserted the 80% figure because 80/20 is considered private equity's standard profit-sharing structure (the 20% is known as "carried interest").

But now let's get into the specifics that undermine Langone's argument:

  1. 1. Romney's former firm, Bain Capital, does not usually employ the 80/20 split. Instead, it goes 70/30 -- one of the most firm-friendly structures within the entire PE industry. This isbeginning to change on select funds, but not on any that are currently active.
  2. 2. Most of the money for private equity deals does not come from state funds, as Langone asserts. It is just one of many sources, which also include private foundations, university endowments, corporate pension funds, sovereign wealth funds and rich individuals. Industry research firm Preqin estimates that the percentage of global private equity contributed by U.S. public pension funds is just 19%.
  3. 3. Bain Capital, in particular, is noted for receiving an unusually high percentage of its fund capital from endowments and foundations and an unusually low percentage of its fund capital from state pension funds. Moreover, Bain does not count either the State of Oregon or the State of Washington among its limited partners (according to reports from Oregonand Washington).

If you have seen an interesting statement about Romney's private equity past, please send it to dan_primack@fortune.com 

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About This Author
Dan Primack
Dan Primack
Senior Editor, Fortune

Dan Primack joined Fortune.com in September 2010 to cover deals and dealmakers, from Wall Street to Sand Hill Road. Previously, Dan was an editor-at-large with Thomson Reuters, where he launched both peHUB.com and the peHUB Wire email service. In a past journalistic life, Dan ran a community paper in Roxbury, Massachusetts. He currently lives just outside of Boston.

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