# Did Bain Capital create more jobs than it lost/destroyed? **URL:** \ **Category:** Factual Questions\ **Created:** [October 23, 2012, 7:48pm UTC](https://boards.straightdope.com/t/did-bain-capital-create-more-jobs-than-it-lost-destroyed/638653 "2012-10-23T19:48:46Z")\ **Posts on this page:** 12\ **Page:** 4
**Author:** ![md2000](https://avatars.discourse-cdn.com/v4/letter/m/73ab20/32.png) [@md2000](https://boards.straightdope.com/u/md2000)\ **Post date:** [October 25, 2012, 4:41pm UTC](https://boards.straightdope.com/t/did-bain-capital-create-more-jobs-than-it-lost-destroyed/638653/61 "2012-10-25T16:41:57Z")
> [@LonghornDave](#): > > Sure, I get the concept of buying an undervalued asset; however, you wouldn’t be able to really gain that knowledge by looking at the balance sheet. Balance sheets are not detailed enough to do that sort of investigation. > > Also, it’s well enough known that assets are valued on a cost basis under GAAP, so I think people ignore the book value of the assets when attempting to value. That’s why I think there is such a massive discrepancy between book equity and market value equity on the stock market. Everyone already knows they can ignore the book value equity. Otherwise, there would be a tendency to not deviate too far from the book value, and I don’t think you see that in the public equity markets at all. Valuation is based on someone else’s expert opinion, which means they use their opinion to pay you $X for something. Millions of dollars of such expert opinion said facebook was worth close to $40/share. Much of this sort of detail analysis is a combination of wild-ass guesses, and should be given the weight it deserves. ---
**Author:** ![Max\_Torque](https://avatars.discourse-cdn.com/v4/letter/m/e9bcb4/32.png) [@Max\_Torque](https://boards.straightdope.com/u/Max_Torque)\ **Post date:** [October 25, 2012, 7:45pm UTC](https://boards.straightdope.com/t/did-bain-capital-create-more-jobs-than-it-lost-destroyed/638653/62 "2012-10-25T19:45:42Z")
> [@LonghornDave](#): > > Good god that article is just comically bad. You don’t buy an ownership interest in a company from the management team of a company; you buy an ownership interest from the current owner. Management are employees working on behalf of the owners. This is so plainly obvious I don’t even understand how a person could confuse it. Could I go an buy your house from your housekeeper? The article doesn’t say that at all. Management compliance is purchased by greasing the skids with bonuses, so that management goes along with whatever the new managing company wants. The article seems pretty plain on that. > [@](#): > > But let’s continue, this supposed example company they use has little debt now and a solid cash flow stream. They call it floundering, but what in the hell is floundering about a company with good cash flow and little debt. I think floundering might be the strangest adjective I could possibly think of to use in that situation. Regardless, the owners are presumably selling their interest to this PE firm in a non-distressed type situation since they have little debt and generate good cash flow, correct? Well, if the PE firm can debt finance nearly the entire purchase price like the article says then doesn’t it obviously stand to reason that the existing owner has sold for far too low a cost? Do you not see the conflict here? Why would a non-distressed seller be selling for far below market value? And here I have to question if you even read the article, much less the quoted excerpt: the article says, “floundering businesses with good cash flows.” You somehow changed that to, “company with little debt and good cash flows.” I’m absolutely at a loss as to how you got from “floundering” to “little debt”. The KB Toys example on page 3 of the article is illustrative. I don’t have a figure for how much debt KB had before they encountered Bain, but, despite having 1300+ stores and a foothold in shopping malls everywhere, KB was facing increased competition from large retailers such as Toys R Us and Wal-Mart and feeling the pinch. Bain took the helm with promises of a turnaround, then broke the piggybank, grabbed everything they could, and split. Gonna have to break the next paragraph up a bit: > [@](#): > > The article’s logic gets even worse though. They say the company is on the hook for the debt, and that’s of course true if the company is the named borrower and no one else has guaranteed the debt, but the PE firm is on the hook for the equity interest position they took? Why put 10% to 40% (the range they quote as usual even though they later have Bain magically debt financing 95% of the their acquisitions) of the purchase price down to buy a company with some evil idea to destroy the value of the company? There isn’t necessarily an “evil idea to destroy the value”. If the PE firm succeeds in turning the company around, all the better. However, even if the purchased company tanks, Bain stands to lose nothing, having taken on so little of the risk themselves. This is spelled out in the article. > [@](#): > > Oh, they have an answer for that: the PE firm somehow magically makes this money back in dividends and management fees. Of course, debt agreements from banks place pretty hefty restrictions on dividends (especially so if the debt position is high as it would be in this instance), so the simple fact that they borrowed so much to help finance the acquisition means they are also limited on taking capital out of the company. The dividends listed in the article, such as the $121 million paid by KB Toys and the $500 million paid by Dunkin Donuts, were very real, were reported on, and are without question. What you say is very likely true, if you assume that each side of the transaction is working at odd purposes for their own interests. When all sides are colluding to loot the treasury, it’s a different story. > [@](#): > > And unless you think they can take out 10% to 40% of the company’s market value in management fees in a short period of time, then you would have to own the company for a long period of time before you could ever hope to recoup you equity investment from management fees. They don’t have to recoup the investment from management fees, they still hold an asset which may be sold. Management fees are just gravy. > [@](#): > > The alternative begs the question of why the original owner would have ever sold the company in the first place if the company generates so much free cash flow annually that the new PE firm owner can take out his entire equity investment plus enough profit to make the entire scheme worth it in the first place all the while staying in compliance with the terms and covenants of the debt agreement. This original owner has got to be the stupidest moron on the planet. We’re talking about leveraged buyouts here. What the original owner wants is just noise in the background to these guys. > [@](#): > > Furthermore, why would banks continually be loaning money to companies owned by this PE firm if they all fail because the PE firms takes out all the cash flow and the company can’t service its debt? This isn’t the situation like in home mortgages where the debt is securitized and sold off to someone else. Corporate loans are held on the books of the bank that made the loan. There is not a very big secondary market for the loans, and they also have pretty low default rates. Like I said before, failures aren’t the norm, and they’re not what Bain hopes for. Still, Bain doesn’t care if the company fails, since Bain makes money either way. Bankruptcies, as noted in the article, happens after about seven percent of PE buyouts, which doesn’t seem excessive. > [@](#): > > Finally, this article is so dumb it doesn’t even know that Goldman Sachs is an investment bank and not a commercial bank. You would never go to Goldman Sachs to take out a loan. They aren’t in the lending business. Right, so the whole article is wrong because he said “Goldman Sachs” rather than spelling out “Goldman Sachs Capital Partners, the private equity arm of Goldman Sachs”. If I used smileys, this is where I’d put a “rolleyes”. ---
**Author:** ![LonghornDave](https://avatars.discourse-cdn.com/v4/letter/l/a87d85/32.png) [@LonghornDave](https://boards.straightdope.com/u/LonghornDave)\ **Post date:** [October 25, 2012, 10:09pm UTC](https://boards.straightdope.com/t/did-bain-capital-create-more-jobs-than-it-lost-destroyed/638653/63 "2012-10-25T22:09:58Z")
> [@Max\_Torque](#): > > The article doesn’t say that at all. Management compliance is purchased by greasing the skids with bonuses, so that management goes along with whatever the new managing company wants. The article seems pretty plain on that. Let’s see. [QUOTE=Rolling Stone] Romney and Bain avoided the hostile approach, preferring to secure the cooperation of their takeover targets by buying off a company’s management with lucrative bonuses. [/QUOTE] He is talking about securing the takeover (buying the ownership interest from the existing owner) by buying off the management with bonuses. Why in the world would they need to secure the management compliance to buy the company? You need to secure an agreement from the existing ownership that the price you are offering is fair. Once you own the company, you don’t need to convince management to go along with your plans. If they don’t then they should be fired and replaced. If you are the owner, it is a given that management would go along with what you say as long as it is not illegal. They have no other choice. His statement here makes no sense as written. > [@Max\_Torque](#): > > And here I have to question if you even read the article, much less the quoted excerpt: the article says, “floundering businesses with good cash flows.” You somehow changed that to, “company with little debt and good cash flows.” I’m absolutely at a loss as to how you got from “floundering” to “little debt”. I think you missed my point. I’m well aware that he calls them floundering. The little debt part comes because the entire purported plan is to load the company up with debt to help finance the acquisition. You can’t load up a company with debt if it is already loaded up with debt. So with that and him saying they have good cash flows, I am questioning how good cash flows plus (at a minimum) manageable debt, can be described as floundering. My point here isn’t that the company isn’t floundering, I’m sure they are. Its that the author seems to be trying to have it both ways. He acts like they were fine before Bain ever came into the picture. He also must state that the reason Bain came in was because they weren’t in good shape (hence the floundering language). My point is that I believe he is underselling just how bad a shape some of these companies were in. > [@Max\_Torque](#): > > There isn’t necessarily an “evil idea to destroy the value”. If the PE firm succeeds in turning the company around, all the better. However, even if the purchased company tanks, Bain stands to lose nothing, having taken on so little of the risk themselves. This is spelled out in the article. And I am saying that he undersells the amount of risk they take on. 10% to 40% of the purchase price is the equity investment according to him. If the company completely fails you lose all of that. > [@Max\_Torque](#): > > The dividends listed in the article, such as the $121 million paid by KB Toys and the $500 million paid by Dunkin Donuts, were very real, were reported on, and are without question. What you say is very likely true, if you assume that each side of the transaction is working at odd purposes for their own interests. When all sides are colluding to loot the treasury, it’s a different story. The KB Toys stuff is ridiculous. The article of course does state that this all happened after Romney left Bain, but it still leaves out important details. Namely, that KB Toys went bankrupt not once, but twice. Even after going through a bankruptcy court reorganization, they still couldn’t survive and were just liquidated the second time. Furthermore, the article (even though it previously pointed out that the KB Toys transactions all happened after Romney left) somehow blames Romney for not turning them around. [QUOTE=Rolling Stone] In the end, Bain never bothered to come up with a plan for how KB Toys could meet the 21st-century challenges of video games and cellphone gadgets that were the company’s ostensible downfall. And that’s where Romney’s self-touted reputation as a turnaround specialist is a myth. [/QUOTE] How was he supposed to turn them around when he was never even a part of the deal? > [@Max\_Torque](#): > > They don’t have to recoup the investment from management fees, they still hold an asset which may be sold. Management fees are just gravy. Bain’s asset is the equity of the company. However, the claim is that the company’s assets have been encumbered with so much debt that they can’t even support it. Therefore, the company’s equity value should be essentially nothing: assets minus liabilities equals equity. Therefore, the Bain asset should be worth nothing in a sale if they really did load these companies with so much debt. > [@Max\_Torque](#): > > We’re talking about leveraged buyouts here. What the original owner wants is just noise in the background to these guys. You missed my point. The article’s logic goes something like this. Company sold by Old Owner to Bain for $10. Bain pays $1 and uses a $9 loan that the company was able to get to pay for that $10. Bain then pays themselves $1 in management fees. Bain then has the company borrow another $3 and give them a dividend. Bain then sells the company to new owners for $5. Company then fails. Bain makes 900% return. Company is stuck with $12 additional in debt and had to pay out $1 in management fees and interest on debt. New owner seems to think company was worth $5 even with $12 additional debt. Why did the Old Owner sell for so little? Why did new owner pay so much for this nearly failed overleveraged company? Seems like the old owner should have sold for so much more and the new owner should have never bought this clearly failing company. Why is Bain able to consistently buy for less than a company is worth and sell for more than a company is worth? > [@Max\_Torque](#): > > Like I said before, failures aren’t the norm, and they’re not what Bain hopes for. Still, Bain doesn’t care if the company fails, since Bain makes money either way. Bankruptcies, as noted in the article, happens after about seven percent of PE buyouts, which doesn’t seem excessive. Or Bain actually does take a financial risk and does lose money on certain deals that don’t work out. That seems to be the obviously far likelier scenario. I’ll note that later in the article, the author uses this quote. [Quote=Rolling Stone] “Bain’s fundamental flaw, at least according to the math,” Ritholtz writes, “is that they took lots of risk, use immense leverage and charged enormous fees, for performance that was more or less the same as [stock] indexing.” [/QUOTE] So which is it, are they taking lots of risk or are they entering into a riskless transaction that they win either way? [Quote=Rolling Stone] Right, so the whole article is wrong because he said “Goldman Sachs” rather than spelling out “Goldman Sachs Capital Partners, the private equity arm of Goldman Sachs”. If I used smileys, this is where I’d put a “rolleyes”. [/QUOTE] You completely misread this. My claim, which I have no idea how you possibly missed this considering the amount of back and forth there was on it, was that the article says that Goldman provided debt when instead they provided equity. No where did I say this invalidated the entire article; the previous several reasons I gave were enough to do that. This shows that the writer does not even have a basic understanding of the roles that these various companies play. In other words, he probably wasn’t very well educated beforehand. How in the world did you come to the conclusion that I cared about the naming convention that he used? ---
**Author:** ![Chronos](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/chronos/32/134_2.png) [@Chronos](https://boards.straightdope.com/u/Chronos)\ **Post date:** [October 26, 2012, 2:39am UTC](https://boards.straightdope.com/t/did-bain-capital-create-more-jobs-than-it-lost-destroyed/638653/64 "2012-10-26T02:39:17Z")
> [@](#): > > Quoth **smiling bandit** : > > Nope. Employee headcount has nothing to do with company health. Frequently the opposite. Take it up with [**puddleglum**](http://boards.straightdope.com/sdmb/showthread.php?p=15623642#post15623642), then: > [@](#): > > However we can surmise from the fact that Bain made alot of money buying and selling companies that some of the companies they sold were healthier and growing more when they sold them. Since growing companies hire many more employees than floundering companies it is quite likely that Bain capital create more jobs than they destroyed. ---
**Author:** ![md2000](https://avatars.discourse-cdn.com/v4/letter/m/73ab20/32.png) [@md2000](https://boards.straightdope.com/u/md2000)\ **Post date:** [October 26, 2012, 1:01pm UTC](https://boards.straightdope.com/t/did-bain-capital-create-more-jobs-than-it-lost-destroyed/638653/65 "2012-10-26T13:01:15Z")
On The Daily Show last night, Jon Stewart was making hay on the stat that Romney said the government should not be picking winners, in fact it couldn’t. Then Stewart quoted some articles that in fact only 8% of Obama’s “picks” went bankrupt, not 50% as Romney’s camp claimed. He went on to quote another study that 22% of the Bain Capital invested companies went bankrupt within 8 years after. Of course, a recent report on Bain just might be biased, and no detail about what proportion were managed vs. sell-offs, but during a bankruptcy it’s a safe bet that some jobs disappear. ---
**Author:** ![John\_Mace](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/john_mace/32/185_2.png) [@John\_Mace](https://boards.straightdope.com/u/John_Mace)\ **Post date:** [October 26, 2012, 1:21pm UTC](https://boards.straightdope.com/t/did-bain-capital-create-more-jobs-than-it-lost-destroyed/638653/66 "2012-10-26T13:21:36Z")
> [@md2000](#): > > On The Daily Show last night, Jon Stewart was making hay on the stat that Romney said the government should not be picking winners, in fact it couldn’t. Then Stewart quoted some articles that in fact only 8% of Obama’s “picks” went bankrupt, not 50% as Romney’s camp claimed. He went on to quote another study that 22% of the Bain Capital invested companies went bankrupt within 8 years after. That’s a rather silly comparison for several reasons, the most obvious being that Obama has been “picking” companies for less than 4 years. ---
**Author:** ![TriPolar](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/tripolar/32/3008_2.png) [@TriPolar](https://boards.straightdope.com/u/TriPolar)\ **Post date:** [October 26, 2012, 1:24pm UTC](https://boards.straightdope.com/t/did-bain-capital-create-more-jobs-than-it-lost-destroyed/638653/67 "2012-10-26T13:24:29Z")
> [@John\_Mace](#): > > Not sure why that is a valid comparison since Obama has been “picking” companies for less than 4 years. It’s certainly a valid comparison in the context in which it was made. Someone with a 22% failure rate shouldn’t be criticizing someone with an 8% failure rate. If the number of years involved matters (4 vs. 8), then Romney should have waited 4 years to bring it up. ---
**Author:** ![John\_Mace](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/john_mace/32/185_2.png) [@John\_Mace](https://boards.straightdope.com/u/John_Mace)\ **Post date:** [October 26, 2012, 1:25pm UTC](https://boards.straightdope.com/t/did-bain-capital-create-more-jobs-than-it-lost-destroyed/638653/68 "2012-10-26T13:25:41Z")
> [@TriPolar](#): > > It’s certainly a valid comparison in the context in which it was made. Someone with a 22% failure rate shouldn’t be criticizing someone with an 8% failure rate. If the number of years involved matters (4 vs. 8), then Romney should have waited 4 years to bring it up. That’s an interesting opinion, but not a fact. ---
**Author:** ![TriPolar](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/tripolar/32/3008_2.png) [@TriPolar](https://boards.straightdope.com/u/TriPolar)\ **Post date:** [October 26, 2012, 1:41pm UTC](https://boards.straightdope.com/t/did-bain-capital-create-more-jobs-than-it-lost-destroyed/638653/69 "2012-10-26T13:41:16Z")
> [@John\_Mace](#): > > That’s a rather silly comparison for several reasons, the most obvious being that Obama has been “picking” companies for less than 4 years. > [@John\_Mace](#): > > That’s an interesting opinion, but not a fact. I assumed that was the theme you had established. ---
**Author:** ![puddleglum](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/puddleglum/32/137_2.png) [@puddleglum](https://boards.straightdope.com/u/puddleglum)\ **Post date:** [October 26, 2012, 1:43pm UTC](https://boards.straightdope.com/t/did-bain-capital-create-more-jobs-than-it-lost-destroyed/638653/70 "2012-10-26T13:43:09Z")
> [@md2000](#): > > On The Daily Show last night, Jon Stewart was making hay on the stat that Romney said the government should not be picking winners, in fact it couldn’t. Then Stewart quoted some articles that in fact only 8% of Obama’s “picks” went bankrupt, not 50% as Romney’s camp claimed. He went on to quote another study that 22% of the Bain Capital invested companies went bankrupt within 8 years after. > > Of course, a recent report on Bain just might be biased, and no detail about what proportion were managed vs. sell-offs, but during a bankruptcy it’s a safe bet that some jobs disappear. The difference is that Bain was a turn around specialist, so it bought sick companies and tried to make them better. Government loan guarantees go to growing companies looking to expand production. The comparison is apples to oranges. It would be like comparing an oncologists survival rate with a pediatricians. ---
**Author:** ![md2000](https://avatars.discourse-cdn.com/v4/letter/m/73ab20/32.png) [@md2000](https://boards.straightdope.com/u/md2000)\ **Post date:** [October 26, 2012, 2:20pm UTC](https://boards.straightdope.com/t/did-bain-capital-create-more-jobs-than-it-lost-destroyed/638653/71 "2012-10-26T14:20:21Z")
> [@John\_Mace](#): > > That’s a rather silly comparison for several reasons, the most obvious being that Obama has been “picking” companies for less than 4 years. It’s not apples and oranges, but it is tangerines and oranges. If the implication is “I can do a better job” then the evidence on the face of it suggests “not as far as we can tell”. I think the main point was to criticize too the claim “50% of the companies Obama’s government invested in have failed”. You want your proposed president to be a bit better at math or truthiness. ---
**Author:** ![John\_Mace](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/john_mace/32/185_2.png) [@John\_Mace](https://boards.straightdope.com/u/John_Mace)\ **Post date:** [October 27, 2012, 2:55am UTC](https://boards.straightdope.com/t/did-bain-capital-create-more-jobs-than-it-lost-destroyed/638653/72 "2012-10-27T02:55:33Z")
> [@TriPolar](#): > > I assumed that was the theme you had established. You know what happens when we assume? 😉 [Previous page](https://boards.straightdope.com/t/did-bain-capital-create-more-jobs-than-it-lost-destroyed/638653.md?page=3)