In reality, the people who lead private equity firms are neither rapacious company killers nor daring risk-takers with a gift for growing jobs. They are professional investors trying to make as much money as possible from their portfolios.
But investors do not measure potential financial rewards in a vacuum. Risk is also part of the equation and private equity investors are particularly skilled at limiting their exposure.
Most private equity transactions are leveraged buyouts, and investors borrow as much as they can. Once a sale takes place, the new private equity owners often look for the first opportunity to recapitalize the company - borrowing more against the business to write themselves dividend checks.
Recapitalizations don’t happen all the time and, when they do, the scale of the payment depends on circumstances. But private equity managers certainly look for that opportunity. In years past, they boasted about investments that quickly returned all the capital originally risked in purchases. Sometimes it was a matter of months.
So what about the businesses operating beneath all that debt? Contrary to campaign rhetoric, most private equity investments do not go bankrupt. The catch: Portfolio companies often pile up the kind of debts that remain manageable in good times but become a big problem when sunny forecasts don’t work out. Who pays the price then?
The Bain Capital record on this issue during the Romney era is spelled out in detail in “The Real Romney,’’ a book by Boston Globe reporters Michael Kranish and Scott Helman in stores today.
Overall, that record is mixed. Bain made piles of money, but at least 10 percent of its companies went bankrupt for a variety of reasons during the Romney era. Many others exited the portfolio with much more debt.
One of the most interesting business stories in “The Real Romney’’ isn’t about Bain Capital investments at all. It’s about Romney’s return to the consulting firm Bain & Co. in its darkest hour.
