Friday, August 17, 2012

King of Bain: Under Romney Bain's Returns Were Higher Risk, Leveraged and Middling

 There's a little black spot on the sun today...

Back in January we posted "Bain Capital's Investments: 1984-1999":
DB Alex. Brown via the Los Angeles Times:

This private prospectus was developed by Deutsche Banc Alex. Brown in 2000 for those who could invest a $1-million minimum in Bain Capital funds. It includes the investment history of Bain Capital from 1984 through 1999, most of the years that Romney ran the firm. After obtaining the prospectus, the Los Angeles Times asked Stanford University economics lecturer Alex Gould to review and interpret the document. Gould is a research fellow at the Stanford Institute for Economic Policy Research and has experience in the world of private equity and venture capital investing. The prospectus, annotated with his comments, appears below...MORE
HT: The New Yorker who writes:
...The prospectus listed sixty-eight companies that Bain Capital’s private-equity funds invested in between 1984 and 1998. It said the funds made an annual return of eighty-eight per cent, which means they almost doubled their money every year. On “realized investments’’—companies that Bain Capital had sold or taken public in an I.P.O.—the investment funds did even better. Over this fifteen-year period, according to the prospectus, the realized investments generated an astonishing annual return of a hundred and seventy-three per cent....
A couple days ago Barry Ritholtz posted "No Alpha: Bain Capital’s Investment Results" at The Big Picture:
The political season is in full throat. While everyone is focusing on Mitt Romney’s VEEP selection of Paul Ryan, perhaps it is time to refocus our views elsewhere.
During the primaries, there were all manner of attacks on Bain Capital as a proxy for Mitt Romney. The criticism for outsourcing and layoffs, for the fortune he earned (estimated at $190 – $250 million). Bain saddled some companies with huge debt, using the proceeds to extract large fees. It was a very sharp elbowed form of capitalism. Surprisingly, the criticism came not from the left, but from Romney’s primary challengers on his right. Strange.
This morning, we are going to review how Bain Capital actually performed as investors. No, they did not (as claimed) return 113% per year. In fact, their investment performance, according to their own data, was rather unremarkable.
Ignore the anecdotal attacks from both opponents and supporters. Thanks to two intrepid Wall Street Journal reporters, the full Romney/Bain record has been reviewed. During the GOP primaries, Mark Maremont of the Journal completed a comprehensive assessment of Bain Capital, including all “77 businesses Bain invested in while Mr. Romney led the firm from its 1984 start until early 1999.” And on August 5, Brett Arends released the ebook The Romney Files, which includes extensive reviews of Bain Capital.
Let’s start with the WSJ article. Among its key findings:
• $1.1 billion invested generated $2.4 billion in gains for its investors over 16 years;
• 22% of the companies either filed for bankruptcy reorganization or closed their doors;
• An additional 8% ran into so much trouble that Bain lost 100% of client money invested in each deal;
• Bain’s returns came from just a small number of investments. Ten deals produced more than 70% of the total dollar gains. (4 of the 10 of these businesses later ended up in bankruptcy court).
• Several of Bain’s biggest successes became household names: Staples, Domino’s Pizza Inc. and Sports Authority.
The Journal analysis shows that in total, Bain produced about $2.4 billion in gains for its investors in the 77 deals, on about $1.1 billion invested. This is before fees, which typically run in the range of 2% annually plus 20% of profits (widely known as “2+20”); Some newer Bain funds run 1 & 30, while some older funds ran 1.5 + 20.

That sounds like a great deal – but it is a far less attractive when you do the math and compare to other alternatives.

The Journal sourced its analysis from a list of 77 Bain investments covering 1984 through 1998 that were included in a document Deutsche Bank AG used to raise capital for a new Bain fund in 2000. The Deutsche Bank doc cites Bain as a source; these deals accounted for about 90% of the money Bain invested during that period. (The Journal days it obtained “updated information from a similar 2004 prospectus.”)...MORE
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