Poll leader Mitt Romney is getting slammed by opponents for the 15 years he spent at private equity firm Bain Capital. To hear the opposition tell it, Romney is not the job-creator he claims to be, but rather a greedy profiteer.
After winning Iowa by a narrow 0.1% margin, Romney was the New Hampshire frontrunner by more than 10 percentage points, according to most polls. Romney's competitors, however, have edged slightly closer amidst increased scrutiny over the former Massachusetts governor's private equity profit-taking.
Critics – especially fellow GOP presidential hopeful Newt Gingrich – got louder leading into today's (Tuesday's) New Hampshire primary, berating Romney for raking in millions as Bain Capital laid off workers and let companies go bankrupt.
"I don't have much respect if you rig the game so you end up walking off with all the money," Gingrich said Tuesday on Bloomberg Television. "[H]e's got some very big questions to answer."
Bain Capital: Capitalists or Corporate Raiders?
Romney co-founded Bain Capital in 1984, a spinoff of management consultant firm Bain & Co. He stayed until 1999, except for a brief two-year stint back at Bain & Co.
"Basically Romney got the Bain Capital job because he was 'teacher's pet' in Bain, and Bain Capital was bound to do well because it had all the very smart people finding deals and having ideas about how to run companies," said Money Morning Global Investing Strategist Martin Hutchinson. "Initially, it focused on venture capital, which genuinely creates jobs, like its work at Staples Inc. (Nasdaq: SPLS), but later it moved to leveraged buyouts, which generally don't create jobs, and can hollow out the company making it vulnerable to failure."
When private equity companies engage in leveraged buyouts, they usually lay off some of the acquired company's workers, as well as take payments in the form of dividends and fees. The target companies are usually sold.
Romney has been highlighting his Bain successes throughout his campaign. In addition to office supplier Staples, the group invested in Dominos Pizza Inc. (NYSE: DPZ) and retailer Sports Authority. Romney claims that projects like these created 100,000 jobs during his Bain tenure – although Bain has no documentation to prove it.
In the 15 years Romney ran Bain, about 22% of the companies Bain invested in declared bankruptcy or closed within eight years of the firm's initial investment, according to a study by The Wall Street Journal. Bain generated about $2.5 billion from those deals, on investments of $1.1 billion.
Critics Blast Romney
Gingrich has been the most outspoken Romney attacker, painting him as a greedy corporate raider instead of a capitalist businessman.
"Is capitalism really about the ability of a handful of rich people to manipulate the lives of thousands of other people and walk off with the money?" Gingrich asked Bloomberg.
Romney rivals Rick Perry and Jon Huntsman Jr. joined Gingrich in blasting Romney's actions at Bain.
"There is something inherently wrong when getting rich off failure and sticking it to someone else is how you do your business," Perry said Monday in South Carolina. "And I happen to think that is indefensible."
Hutchinson said it's a point the opposing party will run with.
"It's too easy for the Democrats to demonize, especially as President Obama is clearly running on a class warfare platform," said Hutchinson.
While Republican opponents continue to demand that Romney address his Bain Capital activity, Hutchinson said the issues will be much more hurtful if Romney ends up getting the Republican nomination.
"The Bain issue is much stronger for Obama, because the electorate as a whole is more suspicious of millionaires and Wall Street than the GOP primary electorate," said Hutchinson. "Republicans bringing it up are partly warning of Romney electoral weakness."
Private Equity Defends Romney/Bain Capital
The private equity business faces increased scrutiny as the Bain Capital backlash intensifies.
The Private Equity Growth Capital Council is already planning to roll out an image campaign in coming months, according to a report in The New York Times. The group wants to promote private equity as a job-creating industry and dispel misconceptions fueled by the Romney controversy.
"There is a lot of misinformation being spread, purely for political purpose and on both sides of the aisle, as it pertains to private equity," the group's interim President and Chief Executive Officer Steve Judge said in a statement Monday. "While the business model has evolved over time, the fact of the matter is private equity provides capital and operational expertise to companies that are often underperforming or on the brink of failure."
If the spotlight on the industry does uncover wrongdoing, it could affect legislation regulating firms' profits that's being debated in Washington.
"Private equity could lose its "carried interest" tax break, where the fees on fund gains are treated as capital gains for tax purposes," said Hutchinson. "It's quite close in Congress, and industry lobbyists could be weakened by this."
The Bain Capital effect on private equity and Romney's road to the White House can be measured as the New Hampshire primary results come in tonight.
News and Related Story Links:
- Money Morning: An Investor's Guide to the 2012 Iowa Caucuses
- CNN Money: What Mitt Romney did at Bain
- Bloomberg News: Gingrich: Romney Must Answer at Bain
- The New York Times: With Romney Under Attack, Private Equity Fights Back