Breaking Down Bain Capital

Private equity firms are under the microscope this week as a pro-Gingrich superPAC hounds GOP candidate Mitt Romney for his role as head of Bain Capital. Weekends on All Things Considered host Guy Raz talks with Dan Primack, senior editor of Fortune Magazine, about how these firms operate and the legitimacy of these attacks.

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GUY RAZ, HOST:

And as we mentioned, that pro-Gingrich superPAC has been hammering Mitt Romney all this week and specifically his actions as the head of Bain Capital, a private equity firm.

(SOUNDBITE OF POLITICAL AD)

UNIDENTIFIED MAN #1: Under Romney, Bain was making billions. At the same time, contributing to the greatest American job loss since World War II.

RAZ: Now, after Congress, Wall Street is among the least trusted institutions in the United States. And private equity firms are now under the microscope. So how do they operate? With me now is Dan Primack. He's senior editor at Fortune Magazine, and he's here to explain all of that. Welcome to the program.

DAN PRIMACK: Thanks for having me.

RAZ: Before I ask you about the attacks on Mitt Romney when he was CEO of Bain Capital, explain, first of all, how a private equity firm works more or less.

PRIMACK: A private equity firm raises money from institutional investors, endowments, pensions, et cetera. So it gets a big pool of money. And then its primary business is to acquire companies and then later sell them, usually several years down the line. And the hope is that you're selling them for more than you bought them for, probably because you helped grow that business, and then you get that return and that profit. And most of that gets distributed back to your investors.

RAZ: In this video, this film, "When Romney Came to Town," that a pro-Newt Gingrich PAC has, of course, purchased in this airing, we hear from a man who worked for a company called UniMac that produced washing machines in Florida.

(SOUNDBITE OF POLITICAL AD)

UNIDENTIFIED MAN #2: If they'd just left us alone as UniMac, I think UniMac would still be running right now, as UniMac.

PRIMACK: I think it was a bad example for the filmmakers to use. And here's why. They were acquired by Raytheon, which already had a laundry business and kind of rolled that Florida factory up into a larger company. And then Raytheon, four years later, sold it to Bain. And then Bain actually sells it to a Canadian pension fund. And it's them, one year later, who shuts the Florida factory. And as for would it have shut down anyway? It's so hard to say. It's eight years after Raytheon first buys them. Maybe it would have still been around, maybe it wouldn't be.

RAZ: Another example in this video is KB toy store claims that Bain basically took it over and eventually left more than 10,000 people without a job.

PRIMACK: It's an example of a terrible investment. Bain bought the company. The company does go bankrupt. From a Romney perspective, it's a little difficult because Romney actually left the firm in 1999. Bain didn't invest in KB Toys until the following year, 2000. And, look, sometimes in private equity, your investments go bad. You do a lousy job managing them, and the companies do go bankrupt.

RAZ: Everything as far as we know that Bain did was and is legal, right?

PRIMACK: Correct. There's no accusations of illegality whatsoever.

RAZ: The question is whether it was moral.

PRIMACK: That is entirely the question, and it really depends on who you speak to. A private equity firm's primary job isn't to create jobs. A private equity firm is supposed to make money for its investors. In fact, that's its fiduciary duty.

RAZ: So when Mitt Romney claims to have created 100,000 jobs, is there any way to verify that?

PRIMACK: Yes and no. Romney's original claim was that he created 100,000 jobs. That's not a claim Romney can make because Bain Capital isn't keeping its jobs information private. Bain Capital never kept track of these jobs. So the claim is very disingenuous, if not outright dishonest.

RAZ: Do analysts measure the success of a private equity firm by the amount of jobs it creates or by the amount of money it makes?

PRIMACK: Money. Money, money, money. That is all a private equity firm really gets judged on. And when you're going to invest or not invest in a private equity fund as a big institution, you're looking at their track record, what kind of returns are they generating for you. Now, you might have - some individual institutions might have some other criteria. But in general, it's returns.

RAZ: It's being called ultra-capitalism by Mitt Romney's opponents. Rick Perry used that term.

PRIMACK: Rick Perry is an interesting case, because Rick Perry is governor of Texas. And Texas teachers' retirement system - one of the largest public pensions in Texas - is an investor actually in Bain Capital. And all of the people on the board of trustees of that pension were appointed by Perry. There is no record that I've seen where Perry either said publicly or instructed people and said, you know what, we might want to take another look investing in private equity because we've got some concerns about it. In fact, that pension fund just committed $4 billion to private equity funds last month. So it's - there's a bit of hypocrisy going on on the part of Perry.

RAZ: There is a photo of Mitt Romney and his colleagues at Bain from the '90s, they're all standing, smiling clutching fistfuls of cash.

PRIMACK: Yes.

RAZ: Not an image he probably wants out there.

PRIMACK: Not at all. I'm sure it's something he regrets. The times that was taken, that was when they had raised their first ever fund, which was only $30 million in change. And for context, Bain's current funds are kind of an eight to $10 billion range. But that's what the picture is from. And now, look, in an era of Occupy Wall Street and people in general upset with what's happened in the financial sector, you don't want a picture of people who've got dollar bills in their mouths grinning.

RAZ: That's Dan Primack. He's a senior editor of Fortune Magazine. He's been speaking with me from member station WBUR in Boston. Dan Primack, thanks so much.

PRIMACK: Thank you.

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