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Mitt Romney's Bain Capital has been labelled, correctly, as "vulture capitalism." But that makes us think, wrongly, that Bain Capital was mostly engaged in venture capitalism.  Don't fall into that trap. It was a private equity firm.

Venture capital, private equity, what's the difference, you say. It's all high finance, you say, sticking it to the little guy.

Not so fast. Venture capital brings us good things like Google. Private equity brings us bad things like layoffs. Follow me over the squiggle for a simple explanation.

Venture capital is what funds all those Silicon Valley startups. Private equity is corporate raiding.

Here's how venture capitalism works: Somebody has an idea for a company. They have a business plan, and they probably have prototypes, maybe a few employees. What they lack is money to expand: money to hire more people, money to buy equipment. So they go to the venture capitalists (VCs). They explain why their potential business could be lucrative. If the VCs agree, the entrepreneurs sell part of their nascent business to the VCs in return for large checks. Usually, the VCs also find and install some management for the baby company, to protect their investment. The entrepreneurs use the money to grow the baby business, and, if the entrepreneurs and VCs are hardworking and lucky, everybody-- entrepreneurs, VCs, and, at least in Silicon Valley, employees of the growing company, make lots of money. Of course, usually the businesses fail, and the VCs lose their money, but when they win they win big.

So, for example, these two grad students at Stanford, Larry Page and Sergei Brin, had this idea for a way to search the web. But they needed money. They went to Silicon Valley VC John Doerr. He gave them some money, and they gave him some ownership of baby Google. After a few years (and the involvement of other VCs), Google went public, and everyone involved, including every single Google employee, made tons of money. Tons. Google made dozens, maybe hundreds, of Google employees into millionaires, including the chef in the kitchen. And the whole world benefited by having this great search engine. And, of course, the VCs made a pile. Everybody won.

Right now, VCs are funding Facebook, Zynga, Groupon, and tons of other successful and unsuccessful startups.

Now let's talk about private equity. With private equity, the investors buy an already mature business, with employees, a existing, often profitable business. The investors use some of their own money, and borrow a lot more, to buy the company. The spent a lot of money, and they want it back.

But the company wasn't producing lots of money right now. If it had been, the private equity firm wouldn't have been able to afford to buy it. Here's the questionable part: the private equity does "financial engineering" to squeeze money out of this existing business. They take out huge loans. They sell off assets. They fire people. They loot (excuse me, underfund) the company's pension fund.  And they use this money to pay themselves large fees, huge fees, enormous fees.

Obviously, you can't just keep borrowing more and more money, firing people, selling off assets, and keep the business going. Not to worry. If the company ends up in backruptcy, hey, no problem, the private equity firm made their zillions of dollars. Who cares about bankrupt companies and employees out of work?

Oh yes, and also, all this money the private equity firm squeezed out of the company it bought is taxed at a tiny rate, much lower than workers pay.

Let's go through two examples with our favorite private equity firm, Bain. You probably have heard of Harry & David, the fruit-basket company. They used to send you catalogs at Christmas, right? BainA different company, not Bain, bought Harry & David in 2004. At the time, Harry & David was a thriving business. BainThe different, not Bain, company loaded up Harry & David with debt the next year and paid itself $100 million in "management fees," giving themselves a 23% profit.

Great for Bain the private equity firm. Not so great for the rest of us. Last year Harry & David "defaulted on its debt and dumped its pension obligations," according to James Surowecki in this New Yorker article, from which I got the Harry & David/Bain story.

A second example is GST Industries.  In 1993, while Romney was in charge of Bain, it bought GST, loaded it up with debt and paid itself big "management fees." While the Bain-backed executives were taking out those big loans and shoveling money into Romney's pockets, they were not funding their pension fund adequately. Eventually, GST couldn't pay back the enormous loans, and it went bankrupt. But because GST hadn't funded the pension fund (even though they had had plenty of money to pay Romney and his cronies), the government Pension Benefit Guaranty Corp. had to pay the employees' pensions. But employees ended up with smaller pensions, and worse benefits, than their contract guaranteed.

So here's how it works: Bain buys a company, and right away takes out enormous loans. They use the loans to pay themselves large "management fees." Then, later, the company discovers that, goodness gracious, it can't pay back the loans and has to go out of business. Bain ends up with millions, and everyone else is screwed.

For more, check out this McClatchy article(strange link, persevere) and this MSNBC article  on Bain. Paul Krugman(behind NYT paywall) points us to Larry Summer's scholarly paper on why private equity firms "create little or no social value," merely "enabl[ing] shareholders to transfer wealth from stakeholders to themselves more so than to create wealth."

Edited to reflect the fact that a different company, not Bain, bought Harry &  David. I very much regret the error, and my sloppiness that led to it.

Originally posted to Cardinal Fang on Mon Jan 23, 2012 at 11:44 AM PST.

Also republished by Community Spotlight.

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  •  Tip Jar (230+ / 0-)
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  •  Excellent post, thanks (26+ / 0-)

    I think I first realized the problem with private equity when I read a NYT article on a mattress manufacturing company a few years ago.  Did you read it? I can't remember enough about it to find it, but it was truly excellent and talked about how with each transaction more of the firm's strength was depleted.  Disgusting.

    I've also been employed at a company with some private equity history. What it meant to employees was a intermittent but fierce emphasis on making the company "look good" often using short term strategies with long-term problems. Ugh.

  •  Venture vs Vulture n/t (14+ / 0-)

    Republicans 2012 . . . Keeping millions out of work to put one man out of a job.

    by jsfox on Mon Jan 23, 2012 at 12:04:10 PM PST

  •  This caught my eye... (5+ / 0-)

    a scholarly paper by Larry Summers? Huh?

    But anyway, good diary and should be recommended.

  •  Harry and David is the company name (4+ / 0-)

    But I enjoyed your diary.

    •  Harry & David, that hull of a store that used to (1+ / 0-)
      Recommended by:

      be in the new shopping mall in my city.  Now a shell of a store with no occupant.

      •  and this year's catalog was full of chocolate (9+ / 0-)

        (a Mormon monopoly, I believe, based on what they did to the artisanal chocolate company my son worked for), and no pears.

        Quite disappointing because Harry and David brought so much joy to my family for many years. That was before the time of fresh pears - all the pears I had known were in cans. Then, Harry and David began sending us a Christmas box (from an anonymous relative, my Mom said), and we learned why people really loved pears.

        Fie on Bain for what they did to the company and no doubt to the Oregon pear growers.

        "There's nothing serious about a plan that claims to reduce the deficit by spending a trillion dollars on tax cuts for millionaires and billionaires." - President Obama

        by fhcec on Mon Jan 23, 2012 at 09:20:10 PM PST

        [ Parent ]

      •  I once worked for Harry and David (0+ / 0-)

        I was a seasonal call center employee along with a lot of other people in Eugene, Oregon. A lot of people with school aged kids counted on 4 weeks of work to pay for their Christmas. Others worked weekends as a 2nd job. They had lots of different shifts which made it easy for students and parents to find something that fit their schedule. Those jobs are gone now. I didn't realize what put Harry and David under.

  •  The VC game isn't as different (5+ / 0-)

    from PE game as you suggest.  VCs did well off the dogs IPOs; the stock purchasers (suckers) and employees didn't.

    •  thats ridiculous (11+ / 0-)

      to blame VCs for the pendulumn of fear and greed of the public markets. Should we subsidize VCs for the post 2001 ten year market swoon?

      Basically its not possible for the VCs to make money and all of the employees of the firm in question to lose out unlike what happens at a PE firm.

      VCs do not take sourcing, deal closing, portfolio company monitoring and exit fees like PE firms do. Nor do they focus on the debt capacity of a real company.

      The ten year returns from VCs have been negative and VCs have had no profit (as a whole) unlike the PE guys.

      To be anti profit for the VC sector would result in no growth in the economy.

      •  Where did I (1+ / 0-)
        Recommended by:

        "blame VCs for the pendulumn of fear and greed of the public markets?"  Can't even imagine asserting that there is such a thing as "the pendulumn of fear and greed of the public markets."

        Nor did I say that the VC sector isn't entitled to profit.  If they in fact invest in operations that have some chance of producing something of value and aren't merely pumping up hopeless dreams and profiting through IPOs.

        •  you seriously don't get it (4+ / 0-)

          VCs inVest when there is nothing but PowerPoint, one or two people and a garage. How could they suck money from the company? Their only hope of a profit is investing their oWn money as you cannot get a bank loan.

          The title of your post is The VC game is not that different. When sourcing, fees, risk and management is all different in what way is it the same?

          Let me assure you that your comment is seriously ignorant about the two professions.

          Other posters have talked about equity ownership when investing. All companies even two person ones are represented by lawyers who generally specialize in these matters. Equity investments are then a negotiation. Note that all an early stage VC has is a dream. There are no physical assets, and no cash other than the VCs

        •  Most start-ups got through multiple rounds (6+ / 0-)

          Of VC financing until they go IPO. Sometimes it's multiple rounds from the same VC, sometimes others, but all share the risk.

          Are some IPO's overvalued and a bad risk for investors? Sure. Investors are in a casino and need to understand that. Not all do.

          Are VCs white knights on horses? Sometimes, but usually they are in it to profit.

          I think the important distinction is that they provide seed capital to grow companies while private equity firms, at best, save some while raping others and make money coming and going. As do brokerages.

          What about my Daughter's future?

          by koNko on Tue Jan 24, 2012 at 01:21:26 AM PST

          [ Parent ]

      •  There are conflicts of interest (4+ / 0-)
        Recommended by:
        Nailbanger, koNko, semiot, howd

        VCs always want as much equity as they can get in return for their investment, and this is at the cost of existing shareholders. Plus they want to get paid and so may press for a company to be acquired, sooner rather than later (unless it is clearly headed to be a Google-size standalone success). So their interests are not always aligned with employees and founders. But they are not predatory, to the extent Bain and their like are.

        •  A brand new baby company doesn't have (0+ / 0-)


          Besides it was real VC's during the tech boom, but a lot of con artists trying to rip off naive investors.

          Congressional elections have consequences!

          by Cordyc on Tue Jan 24, 2012 at 12:09:23 AM PST

          [ Parent ]

          •  Yes it does (1+ / 0-)
            Recommended by:

            A private corporation has shareholders. If I own 100% of my new company, and after getting some funding, I own 50%, then I have less ownership.

          •  Yes, it does. (0+ / 0-)

            The shares are just not traded on any market, and therefore there is no ongoing valuation for those shares.  Also, the number of shareholder is probably limited to the founder and perhaps some employees in exchange for reduced salaries.  Then the VC comes in and also becomes a shareholder in exchange for a bunch of money.

            Then, comes the IPO.  A portion of the company is sold to the public in the form of common stock.  The VC, founder, and employees private shares are converted to common stock.  But, even before the IPO those people are still shareholders.

    •  Though the picture was rosy, (7+ / 0-)

      the VC intent is usually acceptable.
      Yes, investors can suck and they usually want their money first, but those who are speculating on a long term proposition, do not intentionally cripple a business.

      We'd have to look at what was promised and what was a reasonable expectation in the dot.bomb era.
      One problem was the lack of sophistication on both sides of the equation. Workers who didn't know what to expect from stock and investor who did not know what to expect from the company.  It turned out that buying petfood online was better on paper than in real life.

      The diarist is stating that Private Equity firms have a different plan of attack. If they are doing any good, it's when they bail out a truly struggling company. (Basically the opposite of what Bain did in the scenarios above)
      Bain had no intention of making the companies grow or work better. They had no intention of saving the companies.
      The sole goal was to suck the life out of the company and leave it for dead.

      So, a VC who is just a leech with money is just as bad as a PE leech, but it's a harder place to find some juicy blood.

      Please Vote for the Democratic nominee for President in 2012.

      by mungley on Mon Jan 23, 2012 at 06:02:03 PM PST

      [ Parent ]

      •  Not sure how a true VC could be a leech. (5+ / 0-)
        Recommended by:
        mungley, VClib, koNko, mygreekamphora, catfood

        With a startup, there's not all that much to loot.  What are you going to do, repo the water cooler and the card tables?  That's why the two are so different.  The bad private equity firms look/looked for companies who could take on additional debt and then wrote themselves checks (which may or may not be recoverable by stockholders or the company itself, I know the Bar Exam (TM) answer to that but not the real world answer).  With venture capital, there just isn't that much to loot - there is, I suppose, a risk in giving the VC firm too big a chunk of your company as collateral, but that's about it.

        "What Washington needs is adult supervision" - Barack Obama

        by auron renouille on Mon Jan 23, 2012 at 07:11:20 PM PST

        [ Parent ]

        •  There's the leech part, yes. (0+ / 0-)

          Since the previous comment mentioned the era, I was positing that there were Venture Capitalists (Which anyone can be) who asked for more than their fair share in exchange for investments, and who promised unreasonable returns in the form of stock options.

          We can't assume that all venture capitalists get in on the ground floor, and that they are all taking a huge gamble.
          A wise person can infuse cash into a company he expects to succeed.
          An unscrupulous one can all of the profits from said company, leaving the original creator working for a paycheck from that investor.

          Please Vote for the Democratic nominee for President in 2012.

          by mungley on Mon Jan 23, 2012 at 07:35:38 PM PST

          [ Parent ]

          •  That's not how stock options work (6+ / 0-)
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            Sychotic1, mattc129, VClib, tardis10, koNko, sharman

            The VCs wouldn't offer stock options. VCs get stock. That's what they're buying with their money, stock (ownership) in the company. A hard-driving VC would ask for a huge part of the company, perhaps more than the owners want to give, but the owners can always say no.

            Stock options are what the entrepreneurs offer to the pre-IPO employess. A stock option is the chance to buy stock in the company (after it goes public) for cheap. In Silicon Valley, cheap is cheap. I know for sure that many pre-IPO Google employees could buy Google stock for a quarter a share after the IPO, when it was trading for over $200 a share.

            And remember, in the usual case, the entrepreneurs approach the VCs to ask for the investment. It's not like the VCs are doing a hostile takeover. The entrepreneurs voluntarily sell part of their company in exchange for cash to expand the company.

            •  You made my point, and thank you for the (0+ / 0-)


              Workers are promised stock options. My point was that if an outside company controls the corporation through stock ownership and the employees are getting restless, then the directors can keep them at bay by offering stock options.  Yes, it is the true employer who offers the stock. One can also be offered existing stock at preferred prices.

              And it is often the case that Venture Capitalists seek certain industries and certain business models, especially in the software/computer business.

              Once one company becomes successful (like a social networking site) other investors want to jump on that band wagon, and will go looking for those opportunities.

              And back on Private Equity side: Not all of the companies purchased by an entity like Bain are acquired through hostile takeover.

              In the instances cited above, it looks as though the original owners were willing participants and thought they were making a real business deal.

              Anyway, I just wanted to make the point that Venture Capitalists are not necessarily altruistic folks just looking to help struggling inventors.

              Please Vote for the Democratic nominee for President in 2012.

              by mungley on Tue Jan 24, 2012 at 07:38:59 AM PST

              [ Parent ]

    •  Actually, lots of employees; especially (0+ / 0-)

      with the IPOs that got out early enough so that employees's stock options had a couple of years to vest and be eligible for sale. This would be the '94-'99. The bust didn't full exhale until arounf '02, and during much of the downslide, some could still exercise options and make money.

      One of the better features of the dot-com era was that, in most companies, stock options were widely distributed. Previously, they were always reserved for upper management, because, you know, they were taking all the risk.

  •  Recent excellent article (17+ / 0-)

    Tracing a history of Romney, Bain, consulting and private equity in general. It's a very long, but interesting read. Including, on the last page, an attempted explanation for the flip-floppiness.

    Bain consultants did what they could, during their assignments, to improve their clients’ operations, but they were often frustrated by an agent problem of their own: Bain was just a consulting firm, and “a consulting firm,” says David Dominik, an early Romney colleague, “can’t make anything happen.” But Jensen and Meckling had sketched out one potential solution: If managers could secure financing to run their own companies, they might be able to build a better corporation, one that delivered stronger returns to its owners.

    You could view this idea at least two different ways. One was as a chance to change the way American business is run. Another was as a business opportunity to exploit. Romney saw both.

    Every business story begins with a proposition, and the one that launched Bain Capital was the notion that the partners might do better if they stopped simply advising companies and starting buying and running the firms themselves.

    Romney and his team did this sort of thing again and again, sometimes in venture­-capital deals but more often through buyouts—Brookstone, Domino’s, Sealy, Duane Reade. In their more complex deals, they couldn’t rely on their own team to seek out every inefficiency. They needed a more powerful lever, and they turned to the solution Jensen and Meckling had begun to explore a decade earlier: offering CEOs large equity stakes in the company in the form of stock or stock options. This was a relatively new idea, mostly untried in American business. At the same time, a board formed in part of Bain Capital appointees who had put up their own money in the deal would be more engaged in management details. “You have the total alignment of incentives of ownership, board, and management—everyone’s incentives are aligned around building shareholder value,” Dominik says. “It really is that simple.”
    It is arresting to imagine a Romney White House, inevitably filled with as many former Bain colleagues as each of his other public ventures have been: The ­PowerPoints, the 80-20 jargon, the clinical separation of decision-making from ideology, the detachment of those decisions from moral consequence, a persistent blind spot for people as people. It would represent the final ascension of a perfectly American type, one that has already remade the culture of business. I once asked a Bain colleague of Romney’s how Romney thought of his own core competence. “I think Mitt thinks he’s good at being Mitt Romney,” the colleague said.

    from a bright young conservative: “I’m watching my first GOP debate…and WE SOUND LIKE CRAZY PEOPLE!!!!”

    by Catte Nappe on Mon Jan 23, 2012 at 02:26:38 PM PST

    •  Romney has many enemies and cannot (2+ / 0-)
      Recommended by:
      koNko, Catte Nappe

      connect with voters.  Both might either know or sense the reality.

      It is arresting to imagine a Romney White House, inevitably filled with as many former Bain colleagues as each of his other public ventures have been: The ­PowerPoints, the 80-20 jargon, the clinical separation of decision-making from ideology, the detachment of those decisions from moral consequence, a persistent blind spot for people as people.

      When someone is impatient and says, "I haven't got all day," I always wonder, How can that be? How can you not have all day? George Carlin

      by msmacgyver on Mon Jan 23, 2012 at 08:53:53 PM PST

      [ Parent ]

    •  Pres Obama's chief of staff, Jack Lew worked at (0+ / 0-)


      The most important way to protect the environment is not to have more than one child.

      by nextstep on Tue Jan 24, 2012 at 08:18:34 AM PST

      [ Parent ]

    •  If making profits is elevated to a Primary Good (2+ / 0-)
      Recommended by:
      Catte Nappe, catfood

      in and of itself (which is where Republicans seem to put it on the moral spectrum) then what Romney et al did at Bain makes perfect sense.  If making money is the prime directive, then any qualms about layoffs, pension fund defunding, and bankruptcies quickly fall to the wayside with no remorse.  Why should there be remorse?  Making money is good!  We made money!  Ergo we did good!  The welfare of the people is irrelevant to the equation.  Like it or not, that's the way corporations work are constructed to work.  That's why Romney looks utterly confused when he is attacked for his track record at Bain. "But I did good!"

      Trouble is, making money is NOT the prime directive of government and never will be.  I don't think Romney gets that at all.  Private equity-style "turnaround tactics" do not fit the bill, because governing really is all about the welfare of the people.  

      •  According to the article (1+ / 0-)
        Recommended by:
        Domestic Elf

        It was Bain, and other consultants like them, that reconfigured corporations to that prime directive, removing any concern for the people involved, the long term health of the company, the betterment of the community, or anything else,  from the equation.

        The theory said management should measure everyone’s productivity in a firm, down to the lowliest employee, and every last worker should be rewarded or punished depending upon his performance, but the social relationships of business seemed to have decayed into a long, amicable golf-course lunch. There was a loyal, almost paternalistic attitude toward workers, protecting them even when they seemed to be drags on growth. When I interviewed Romney’s early colleagues about the business world that they surveyed during this period, they tended to adopt an attitude of high disdain. Sloppy, one told me. Complacent, said another. Lazy, said a third, and out of tune with the change that was going on in the world.
        Corporations realigned themselves to deliver more value to their shareholders, increasing dividend payments and stock buybacks. Within a decade, ordinary businesses were giving large stock and option packages to CEOs. Executive compensation soared. These Bain Capital guys, says Neil Fligstein, an economics-sociology professor at the University of California, Berkeley, were agents of the shareholder value revolution. By the mid-nineties, The Business Roundtable had changed its definition of the role of a company, winnowing a broad set of responsibilities down to a single one: increasing shareholder value

        from a bright young conservative: “I’m watching my first GOP debate…and WE SOUND LIKE CRAZY PEOPLE!!!!”

        by Catte Nappe on Tue Jan 24, 2012 at 01:01:17 PM PST

        [ Parent ]

        •  Exactly (1+ / 0-)
          Recommended by:
          Catte Nappe
          ...winnowing a broad set of responsibilities down to a single one:  increasing shareholder value.

          That's the only responsibility Mitt Romney (and the rest of the 1%) have ever felt beholden to.  And not only did they reconfigure corporations to that goal, but also shaped the country's economic policy to facilitate it.  And somehow still have the gall to call it "free market capitalism."

          So on that score, they are a resounding success.  Unfortunately at the expense of everything and everyone else, which kinda rubs me the wrong way.

          •  And reconfiguring government in similar fashion (1+ / 0-)
            Recommended by:
            Domestic Elf

            According to some proposed model legislation:

            (a)The Congress declares that it is the policy of the United States —  
            (1)to promote the better execution of the laws, the more effective management of theexecutive branch and of its agencies and functions, and the expeditious administration of the public business;  

            (2)to maximize the use of technology, to ease the burden of compliance and disclosure,and to promote more effective management and efficiency in the administration of thepublic business;

            (3)to reduce expenditures and promote economy to the fullest extent consistent with theefficient operation of the Government;

            (4)to increase the efficiency and the accountability of the operations of the Governmentto the fullest extent practicable;

            (5)to group, coordinate, and consolidate agencies and functions of the Government, asnearly as may be, according to major purposes;

            (6)to reduce the number of agencies by consolidating those having similar functionsunder a single head, and to abolish such agencies or functions thereof as may not benecessary for the efficient conduct of the Government; and

            (7)to eliminate overlapping and duplication of effort.


            from a bright young conservative: “I’m watching my first GOP debate…and WE SOUND LIKE CRAZY PEOPLE!!!!”

            by Catte Nappe on Tue Jan 24, 2012 at 01:32:01 PM PST

            [ Parent ]

            •  Not a bad effort to find efficiency (0+ / 0-)

              I certainly do agree that rooting out inefficiencies within government is a laudable goal.  That I can agree with; but I don't think that we can trust the short-sighted, slash-to-the-bone techniques Bain perfected to drive that effort.  Clearly they have a different definition of success than I do.

  •  You might want to add (9+ / 0-)

    separate tag just for Bain and for Romney, so folks can find this in the future.

    Good clarification of important differences.

    and the mcclatchy link didn't work at all for me...

    Words can sometimes, in moments of grace, attain the quality of deeds. --Elie Wiesel

    by a gilas girl on Mon Jan 23, 2012 at 03:06:59 PM PST

  •  debt assignment to the purchased company (3+ / 0-)
    Recommended by:
    mungley, raincrow, LiberalBadger

    I had heard that when an equity firm incurs debt because they have purchased company X, then that debt winds up getting assigned to company X itself, and paid off by the company and the workers.

    Then when the company is sold to the next equity firm, that sale price is simply put into the pockets of the equity firm.

    •  close (11+ / 0-)

      Basically if the purchased company has any cash or has assets/cash flow that allow it to borrow money then a typical response is to take available assets and pay down the "debt" incurred during purchase.  this is the leveraged part of a leveraged buyout.  In some instances operating profit is used to pay the interest on "debt" incurred during the purchase.  remember private equity firms are typically purchasing with part of their own cash and part of some cash from institutions (pension funds and the like) so the "debt" is actually owed to the private equity owners.  they like to see a nice steady return on the money they paid in so there are management fees and commissions, but the most basic aspect is simply to take a dividend even if the purchased company has to borrow money to pay the dividend.

      the big yard stick for these guys is EBITDA, essentaily a measure of operating profit, indicating an ability to support debt.  trouble is that it is hard to maintain without inward investment EBITDA and you don't get much investment when all of your cash flow is going to service debt, hence cost cutting and layoffs.

      there is only one reality, republicans just forget at times

      by Bloke on Mon Jan 23, 2012 at 06:48:36 PM PST

      [ Parent ]

  •  Great explanation if you do a follow up (12+ / 0-)

    you should explain how vulture capitalist pay lower tax rates for this type of behavior. The tax rate break was designed with venture capitalist in mind but private equity and hedge funds have exploited it for their own (and their shareholders benefits).

    -1.63/ -1.49 "Speaking truth to power" (with snark of course)!

    by dopper0189 on Mon Jan 23, 2012 at 05:50:05 PM PST

    •  dopper - carried interests go back 60 years (5+ / 0-)

      Carried interests go back to a fundamental change in partnership law more than half a century ago and predate venture capital, and certainly the more recent private equity and hedge funds. The key difference between a corporation and an investment partnership is that, in a partnership, profits and losses can be allocated on whatever basis is agreed to by all the partners. They do not need to be allocated in relationship to capital accounts (how much you invest). Therefore if the investors are willing to make the managing partners equity holders that is all that is necessary under partnership law. The earliest users of this were in real estate and prior to the Tax Reform Act of 1986 it was easy to create tax shelters that had great economics for both the investors and the managing partners. It was also a very common structure in Oil & Gas exploration and development, movies, R&D and many others besides real estate.

      "let's talk about that"

      by VClib on Mon Jan 23, 2012 at 09:37:02 PM PST

      [ Parent ]

  •  Thanks for the diary. (3+ / 0-)
    Recommended by:
    AuntieRa, mconvente, Matt Z

    Important distinction.

    Please Vote for the Democratic nominee for President in 2012.

    by mungley on Mon Jan 23, 2012 at 05:52:16 PM PST

  •  Thanks for this diary (1+ / 0-)
    Recommended by:

    I'd seen the conflation elsewhere on Dkos but wasn't sure if Bain was involved with startups.  Now I realize that this is a source of confusion and should've been corrected.

  •  The new head of the debt hawk party (1+ / 0-)
    Recommended by:
    Empower Ink

    I almost can’t tell which I want more to be the Rs standardbearer this election.  Almost ghost of Rs past and Rs future:  Gingrich, savior of family values (really, our First Lady was the Other Woman?  With the half million dollar line at Tiffanys.  But at least she’s not angry like that Michelle.  Callista told Newt she didn’t care who he screwed around with.)  Who made his millions,  that allow him to sneer at everyone else selling Washington influence after his own party ran him out of town on ethics violations,

    Mitt, the face of vulture capitalism.  Who made his millions looting American companies, at 15% tax rate.  Who if any one was listening at all, told us clearly that his economic plan is to let everything “hit bottom.”  And then—he said this!—let the vulture capitalists come in and scoop it up for nothing.

    And now this.  This is beyond delightful.  This is going to be the head of the deficit-virtuous R party.  A perfect little cherry on top, that this was the mechanism to loot and dump.  

    The best metaphor yet is the mafia bustout, as seen on The Sopranos.

  •  If one company owns another... (1+ / 0-)
    Recommended by:
    koNko is it possible for the parent company to be completely unobligated to pay off the debt of the company they own?

    If a REAL person dies, companies go after spouses, children, parents to try and get that money back (whether they're legally culpable or not).  How would a parent company not be culpable for a child company's debt?

    I started a blog. It's still a work in progress but if you're interested, come on by. Dawn of Ambivalence

    by DawnG on Mon Jan 23, 2012 at 06:12:48 PM PST

    •  Because they own a company (4+ / 0-)

      If I own shares of Enron, and Enron defaults on its loans, I don't have to pay. Same with Bain Capital. If they own GST, and GST defaults on its loans, Bain doesn't have to pay.

    •  For one thing, (1+ / 0-)
      Recommended by:

      You are not liable for the debts of those you inherit from.  The estate is liable, but there are complex laws that protect much of the average person's estate from creditors.  But if after the estate has been settled, if you get a call from the decedent's creditors, odds are that you can safely hang up on them.  Of course, nothing is 100%, strange situations may occur, this is not legal advice, yatta yatta yatta; I do not know what obligations heirs may or may not have if the estate is not properly settled.  I knew through a mutual friend someone who did what you described for a company that contracted with Bank of America, called up people whose parents or siblings had just died and tried to extort money out of them to pay the debt.  She did it because she had no other job prospects but it really sucked the soul out of her.  Was awful to watch, even at the distance I was at.  Thankfully, she eventually got out of the job - I don't even think she had a new one lined up, I think she just quit.

      Anyhow, the same general idea goes for stock - the big idea of stock is that you can only lose what you paid for the stock.  The worst that can happen to a stockholder is for that stock to be wiped out, to become worthless.  I think that's fair, particularly given that there are a lot of regular, middle class people who surely own stock in companies that will fail at some point.  There's no real indemnity on your purchase price of the stock, you do run the risk of losing the entire purchase price, but unless a particular stockholder engaged in bad business, that's all you can lose.  But sometimes that leads to inequitable things; if a business owns another business in certain ownership structures, the parent company has the same protections - all that they can lose is their purchase price, more or less.

      "What Washington needs is adult supervision" - Barack Obama

      by auron renouille on Mon Jan 23, 2012 at 07:23:00 PM PST

      [ Parent ]

      •  Is this a case of the banks not doing their (2+ / 0-)
        Recommended by:
        Nailbanger, catfood

        Due Diligence and finding out if the companies they are lending to are, in fact, owned by an entity who expressly formulates their business around the concept of non-payment of debt?

        Do these PE firms instigate fresh lines of credit, new bulk financing, or do they just feed off existing credit flows and cash income?

        I have trouble understanding how they arent 'red-flagged' by any decently staffed lending institution.

        Prohibition makes crimes out of things that are not crimes - Abraham Lincoln

        by Unseen majority on Mon Jan 23, 2012 at 07:43:49 PM PST

        [ Parent ]

    •  DawnG - they don't have a parent sub relationship (2+ / 0-)
      Recommended by:
      tardis10, koNko

      The private equity fund owns shares, just like if you owned shares of Apple. The difference is that they own all the shares, but they don't have a parent subsidiary relationship. That would cause havoc with the investment partnership structure. The partnership never takes on any debt, all the debt is obtained in the name of the company. The lenders know that they can only look to the company for repayment.

      "let's talk about that"

      by VClib on Mon Jan 23, 2012 at 09:40:08 PM PST

      [ Parent ]

    •  psst. Because, in this case, they aren't people. (0+ / 0-)

      wink, wink

  •  Without a doubt, (2+ / 0-)
    Recommended by:
    VClib, Loudocracy

    private equity deals gone bad produce more human suffering. But I am not sure more than the size and complexity of the deals is needed to explain that. Larger investors get more downside protection... because they are larger investors. For the "conspiracy theory" view of private equity to hold, you'd have to believe there are really stupid institutions lending millions to companies on the verge of implosion so that PE firms can laugh all the way to bankruptcy court. It really isn't that simple.

    •  The point is, Bain isn't taking any risk here (9+ / 0-)

      but everyone else is. Bain buys the company, but then immediately takes out huge loans and pays itself off. The company might succeed, and then Bain would make even more money and the creditors would do well.

      But if the company fails, Bain loses nothing. They're playing with the house's money. The employees are left with no jobs and reduced pensions, and the US government is left with having to pay those reduced pensions because they're underfunded, and Bain laughs all the way to the bank.

      Privatize the gains, socialize the losses. Nice work if you can get it.

      •  Fair, (0+ / 0-)

        if somewhat exaggerated, point regarding risk (and the reward is more limited as well). Maybe I'm just jaded, but I think you're just observing that rich people have power. Color me shocked...

        Of course the wealthy don't worry about losing their jobs or pensions (though, if we're being honest, what companies still offer pensions these days?) The guy who can pull the trigger on a $50m investment that your company needs has a lot of leverage. It sucks when target companies are overly optimistic and make a bad deal. That happens sometimes, and other times things work out and everyone gets rich.

        So what do we do? Make the rich pay more in taxes? Sure, sign me up. But it won't change the fundamental dynamic I just described. That's why I tend to put this sort of diary in the "old man yelling at clouds" category.

        •  The company didn't ask to be bought (4+ / 0-)
          Recommended by:
          Nailbanger, Sychotic1, MKinTN, Matt Z

          These private equity firms are buying publicly held companies. The money they pay to buy the companies doesn't go to the company; it goes to the previous stockholders. So they're not making an investment in the company. Rather, they're taking money out of the company.

        •  As to your question, (1+ / 0-)
          Recommended by:
          So what do we do? Make the rich pay more in taxes?

          The purchasing firms wouldn't be so cavalier if they had some skin in the game.  As it is now, all they stand the risk of losing is the purchase price.  But that would have to be a careful reform, as it should really only change the obligations of private equity firms, not the average schmuck with a 401k that as one part of their portfolio has stock in a company that fails.  It's to difficult to draw that line, legally, too many opportunities for shenanigans.

          "What Washington needs is adult supervision" - Barack Obama

          by auron renouille on Mon Jan 23, 2012 at 07:26:19 PM PST

          [ Parent ]

      •  CardinalF - while Bain leverages their equity (1+ / 0-)
        Recommended by:

        If a portfolio company goes over the cliff they still lose their equity stake, minus any fees they have been able to extract. It also really hurts their returns and ability to raise the next fund.

        "let's talk about that"

        by VClib on Mon Jan 23, 2012 at 09:44:02 PM PST

        [ Parent ]

        •  Which is why they seldom make deals (1+ / 0-)
          Recommended by:

          Unless they see a way to cover their basic investment.

          I tend to think more PEs go bad when they get over their heads on short-term obligations, particularly if they plan a break-up that goes bad and cannot extract what they expected in fees and capital gains on the shares.

          RJR Nabisco being a classic case.

          What about my Daughter's future?

          by koNko on Tue Jan 24, 2012 at 02:18:16 AM PST

          [ Parent ]

    •  It's not because they are big (5+ / 0-)
      Recommended by:
      howd, mygreekamphora, MKinTN, Matt Z, catfood

      It's because they take ownership of shares in the target company - a separate legal entity - without assuming legal liability.

      And they don't invest unless they determine up-front that they can cover their investment in shares - bought on the cheap - with management fees in the short term (mitigating risk).

      So in essence, they are gambling that they can:

      (a) rehabilitate the company to sell it to make additional profits from the shares they own, or;

      (b) make enough in fees to profit while they run the target into the ground.

      Guess which is quicker and easier.

      What about my Daughter's future?

      by koNko on Tue Jan 24, 2012 at 02:11:59 AM PST

      [ Parent ]

  •  Another good term would be carrion capitalism n/t (4+ / 0-)

    Ideology is when you know the answers before you know the questions.
    It is what grows into empty spaces where intelligence has died.

    by Alden on Mon Jan 23, 2012 at 06:47:38 PM PST

  •  They're like one of those wasps (10+ / 0-)

    ...that lay their eggs inside another living insect, leaving them to hatch later and eat the still living insect.

    Ideology is when you know the answers before you know the questions.
    It is what grows into empty spaces where intelligence has died.

    by Alden on Mon Jan 23, 2012 at 06:50:21 PM PST

  •  thanks for this clear explanation (1+ / 0-)
    Recommended by:

    "Politics is like driving. To go backward put it in R. To go forward put it in D."
    Must see video: When Mitt Romney Came to Town

    by TrueBlueMajority on Mon Jan 23, 2012 at 06:51:02 PM PST

  •  You took out Harry and David's??? (1+ / 0-)
    Recommended by:

    You bastards!

    Being ignored is the difference between being a one percenter and an American.--sweeper

    by SouthernLiberalinMD on Mon Jan 23, 2012 at 07:44:28 PM PST

  •  Who keeps giving them loans? (0+ / 0-)

    If banks know they're just going to file bankruptcy, how would Bain keep getting loans?

    Hyperbole will be the death of us all!

    by MrHinkyDink on Mon Jan 23, 2012 at 08:09:07 PM PST

  •  Mitt hopes people won't care (5+ / 0-)

    And he's probably right. You're completely spot on about the difference between VC & PE funding, but anyone who thinks Mitt's the tits thinks it's all the same. People in the 'undecided' column can be swayed if the discussion is simplified, which you've done a tremendous job doing.

    I would like to point out that there are of course some complexities in the discussion. VC funding, for example, can certainly be brought in after a company has already gotten plenty of FFF money, SBA (govt-guaranteed) loans, and angel investments, and has even started making money. Venture funds can often bring a tested idea to a new level, like nationalizing a successful local retail model. Staples was this kind of early success for Romney, before he shifted Bain Capital more toward PE.

    An unmentioned negative side of a success like that is that it's hard to find a local stationery store any more. Bain has a lot of these 'category-killers' on its resume.

    BTW, Bain Capital does have a venture side, and it's interesting that they kind of have a chip on their shoulder about their history on that page, wouldn't you say?

  •  You've made the distinction well... (3+ / 0-)
    Recommended by:
    VClib, mygreekamphora, Matt Z

    and I'm speaking as someone who has personal knowledge of VC funding as a principal in a startup back in the 1990's that actually got funding from a VC. There's no question that the VC got a big chunk of our fledgling company but it was certainly a high risk venture with no guarantee of success. The VC got no value other than stock as we had no sales or tangible assets. The guy was tough but I felt honest and ethical as well. If he had a failing, it might have been a sense of loyalty and obligation to people who displayed neither honesty nor ethics.

    Just another faggity fag socialist fuckstick homosinner!

    by Ian S on Mon Jan 23, 2012 at 08:22:07 PM PST

  •  Thanks for that! (2+ / 0-)
    Recommended by:
    mconvente, Matt Z

    I didn't know the difference. Now I do.
    Fuck Mitt. He and his whole ilk are not what is right with America, they are what is WRONG with America (well, among a few other things).

    A conservative is a man with two perfectly good legs who, however, has never learned how to walk forward. Franklin D. Roosevelt

    by MA Liberal on Mon Jan 23, 2012 at 08:25:47 PM PST

  •  So let's call it "Pirate Equity" n/t (6+ / 0-)
  •  Best explanation of (1+ / 0-)
    Recommended by:

    "how it works" that I've read anywhere. Short, concise, and spot-on precise. Thanks.

    Just because it's made up doesn't mean it isn't true.—Plan 10 from Outer Space

    by mofembot on Mon Jan 23, 2012 at 08:40:06 PM PST

  •  Why on earth would anyone get involved with (1+ / 0-)
    Recommended by:

    a Private Equity firm, then?

    Not that I'm doubting that a PE firm is bad – I've hard negative things about them for years and years – but there has to be SOME reason these companies are inclined to get in bed with a vampire.

    Is it that they claim they can grow them company through "strategic management" or something along those lines?

    My style is impetuous.
    My defense is impregnable.

    by samfish on Mon Jan 23, 2012 at 08:46:15 PM PST

    •  Because they are desperate (1+ / 0-)
      Recommended by:
      Words In Action

      That's the only reason.   It happened to Clear Channel which was a horrible company to start but they were looking like they were going to fall apart on their own so they sold their sould even more.

      I know because I was there and was a victim.

      FYI - the bluedog thing is about my dog ... I'm a liberal left winger and proud of it.

      by bluedogsd on Mon Jan 23, 2012 at 09:45:20 PM PST

      [ Parent ]

    •  samfish - the PE firms purchase all the stock (3+ / 0-)
      Recommended by:
      tardis10, howd, MKinTN

      at a premium to the current price. So all the former stockholders are gone, their shares have been purchased in a transaction where the PE firm has offered a market clearing price. Most often this is supported by the management who will be given a meaningful stake in the company going forward.  

      "let's talk about that"

      by VClib on Mon Jan 23, 2012 at 09:48:53 PM PST

      [ Parent ]

    •  stockholders get a premium (2+ / 0-)
      Recommended by:
      tardis10, MKinTN

      and usually take the money instead of uncertain future gains and management loves this kind of deal where they get huge buyouts for nothing. Often they even get to stay on for some period for yet more cash. The losers are the non-executive employees, of course.

      We don't inherit the world from the past. We borrow it from the future.

      by minorityusa on Mon Jan 23, 2012 at 10:57:38 PM PST

      [ Parent ]

    •  Asshole owners looking to exit is one story (5+ / 0-)

      The Bain deal I worked unsuccessfully to block was triggered by the founder wanting a big cash-out at retirement.

      To realize a big "score" that he thought would impress his country club buddies, he threw the 250 employees who really built most of his business to the wolves.

      Perhaps our biggest problem in the US right now is the utter collapse of character - unbridled greed, ruthless disregard for community and quality of life - among our "executive" class overlords.

      2010: An Unforced Error Odyssey

      by Minerva on Tue Jan 24, 2012 at 12:55:43 AM PST

      [ Parent ]

  •  Articulately stated (0+ / 0-)

    I used to work for a VC in strategic planning - i've been trying to explain to my friends the difference - now i'll just point them to your post.

  •  This caught my eye (0+ / 0-)
    Here's the questionable part: the private equity does "financial engineering" to squeeze money out of this existing business. They take out huge loans. They sell off assets. They fire people. They loot (excuse me, underfund) the company's pension fund.  And they use this money to pay themselves large fees, huge fees, enormous fees.

    Romney has one business model and used it as Governor:

    12/11:"We had a $3 billion budget shortfall," Romney explained.

    "We decided we were not going to raise taxes, and we found that some fees hadn't been raised in as many as 20 years. These were not broad-based fees for things like getting your driver's license or your license plate for your car, but instead something like the cost of a sign on the interstate and how much it was going to cost to publish a McDonald's or a Burger King sign on the interstate. We went from, like, $200 a sign to $2,000 a sign," said Romney.

    But Widmer says the fees were broader than Romney suggests, adding that Romney's fee hikes were ones "the average citizen of Massachusetts would pay."

    He says Romney proposed raising tuition at state schools. He raised the fees for when you buy a house and register the deed with the state.

    Romney even proposed creating a fee for blind people, says Widmer: $10 to receive a state certificate of blindness. He also proposed boat registration fees and increases for state ice-skating-rink rentals.

    Altogether, Widmer says, the former governor pushed through dozens of higher fees.

    When someone is impatient and says, "I haven't got all day," I always wonder, How can that be? How can you not have all day? George Carlin

    by msmacgyver on Mon Jan 23, 2012 at 08:49:24 PM PST

  •  I love the fact that "Vulture ... (3+ / 0-)
    Recommended by:
    Minerva, tardis10, Matt Z

    ... Capitalism" has become a phrase known to so many people in so short a time, but it is really kind of off with Mitt Romney. Vultures are commonly understood to feed off of the dead, and Romney, come to find out, has been feeding off of companies that could stay in business and make a profit without him. I would suggest, instead, "Vampire Capitalist," as he sucks the blood (money) out of companies that without him would be doing fine. But this term might excite the gothic fantasies of some younger women.   /snark

    Seriously, I would think that "Virus Capitalism" and Mitt Romney as the "Virus Capitalist" would be more apropo. He is basically a dead-fish, and aren't viruses dead or at least not living in any way we understand the term? They latch onto living organisms that would be healthy without them and suck the life out of them with no sympathy or emotion for the damage they do or the destruction they cause.

    Other possibilities? "Lamprey Capitalist" or "Leech Capitalism." Any of those are more appropriate to me. Like a Lamprey or Leech or Virus or Gordon Gekko, greed is good for Mitt Romney no matter the consequences.



    Republicans, like Zombies, just want to get a head.

    by Tortmaster on Mon Jan 23, 2012 at 09:15:19 PM PST

  •  They are all private equity firms. (0+ / 0-)

    Romney's Bain is a corporate raider. Think Ivan Boesky, etc. Think Wall Street, the movie, the original one released in the 80s.

    H'mm. I'm not terribly into this, anymore.

    by Knarfc on Mon Jan 23, 2012 at 09:18:23 PM PST

    •  Not correct - VC and PE are very different (1+ / 0-)
      Recommended by:

      Venture capitalists are also greedy but they do fund companies that need it for the right reasons.   People who seek VC are actively looking to better a product.   They have to be careful how they do it - how much they give away, what they agree to, etc but the concept is generally to advance the product.

      Private Equity people are the vultures - it's a very defined thing - they jump in with an ailing company, gut it, "streamline" it but generally destroy what made the company in the first place.

      FYI - the bluedog thing is about my dog ... I'm a liberal left winger and proud of it.

      by bluedogsd on Mon Jan 23, 2012 at 09:50:52 PM PST

      [ Parent ]

  •  Well if it cuts down on those blinkin' catalogs... (0+ / 0-)

    This health care system is a moral atrocity. Dr. Ralphdog

    by AllisonInSeattle on Mon Jan 23, 2012 at 09:46:28 PM PST

  •  In the 80s, Bain = LEVERAGED BUYOUT (4+ / 0-)
    Recommended by:
    VClib, Words In Action, MKinTN, Matt Z

    In the 80s, the term used for most of what Bain did would be called leveraged buyout. Doesn't even sound nice like venture capital or private equity, does it.

    The Romney-era Bains mostly secure debt or deals to buy companies and then parcel out and sell the business to make fast money. They make a huge amount of money from fees and they really don't care if they build or destroy, whatever makes the most money.

    The top half at least of VCs are usually, primarily investors. They put money in to start (although it may well be other people's money) or build or maybe turnaround but they usually do not take fees. A VC who takes fees is commonly thought of by the rest of the industry as a bottom feeder. A deal that mostly involves debt is not a true venture deal, although a VC may secure a line of credit for a startup as part of a venture deal.

  •  What triggers a PE buyout of a company? (0+ / 0-)

    Is a company targeted because it has a lot of assets and low profit?  In other words, is the company's physical plant (for example warehouses, manufacturing and packaging equipment, etc) quite valuable but the profit on its sales relatively low.  I would think that in order to borrow against the physical plant that the company would at least be turning a small profit and not losing cash hand over fist.  Am I wrong about this?

    •  Various reasons (2+ / 0-)
      Recommended by:
      mygreekamphora, MKinTN

      Generally, yes, but with different objectives.

      Sometimes it is to acquire assets at a low price to turn them around at a profit, such as a firm with higher "break-up" value than book value (i.e., undervalued assets in a conglomerate or to spin-off potentially profitable businesses while killing unprofitable ones).

      Quite often the "assets" are not physical, per se, but products, IP or simply business (customers and an order backlog). For example, PEs often buy groups of companies in a given industry, consolidate the good assets and bundle them for a sell-off, and then bankrupt the remainder, a process that is not unusual in mature industries going through market consolidation.

      For example, the huge steel company ArcelorMittal was initially formed by a PE (Mittal) that consolidated various faltering companies forming Mittal Steel, which then acquired Arcelor, Bethlehem Steel and LTV taking the business and closing plants, and has continued to acquire numerous steel plants across Europe and Asia.

      It's the exceptional case where the PE has retained control of the company for years rather than divesting, but the company's growth has been driven primarily by acquisition of  market or production assets on the cheap, and stripping out the liabilities, verses organic growth by building a new business.

      The thing people have to understand about physical plants is that the value of capital equipment declines in value while real estate or the business itself may retain value. So the trick is to "extract" that value by whatever means convenient.

      So this is what the diary is trying to contrast in opposition to VCs, which basically fund start-ups on the assumption there will be growth in company value or at least the opportunity to convince other investors by selling shares at a profit or taking the company public in an IPO.

      There are VC sharks (in fact the term "vulture capitalists" was originally applied to them) but the basic underlying principle is to create value, not scavenge for it.

      And you may note that many VCs are actually experienced veterans of creating companies in the industries they operate in and bring more to the picture than just funding.

      That said, the next comment down thread from your own raises the issue of "Wall Street" VCs and explains this.

      I'd also add there is a third type of VC deal where a VC assembles a group of corporate investors who are planting seed capital for a technology they may be interested in acquiring later. So the lead VC may go to Apple, Microsoft, whomever and pitch them to invest.

      The "Siri" technology in the Apple iPhone 4S is exactly such case - Apple was a VC investor and ultimately bought the company (which never went public) to acquire the technology.

      Personally, I don't think you can lump all VCs together.

      What about my Daughter's future?

      by koNko on Tue Jan 24, 2012 at 04:34:36 AM PST

      [ Parent ]

    •  Steady profits and low growth... (0+ / 0-)

      One kind of target for a PE buyout is a company with steady profits, but little or no growth.  If the company is public it might pay a dividend.  But, because it is not a "sexy" company with significant growth its stock price is relatively low compared to the rest of the market.

      The PE company can assemble lenders for the buyout because they can show the payments on the loans are less than the profit turned by the company.  The purchase goes through and the loans go on the purchased companies balance sheet.  The PE have not made money, yet.  Once it has the company a few layoffs to reduce costs and increase profits and they can go get some more loans because the profits show that the company can pay those loans, and the PE firm basically uses the loan money to pay themselves.  Now the PE firm has made money.  If they are lucky the company may survive and even grow under new ownership and all is well.  More likely the weight of the debt payments prevents reinvestment in the company causing a long term loss of revenue.  The layoffs cause a long term loss of revenue  And/Or economic forces cause a loss of revenue.  Any of these results in the company being unable to make its loan payments and enter bankruptcy.

  •  Making VCs look good by comparison is a joke (5+ / 0-)
    Recommended by:
    ivote2004, Cordyc, Minerva, tardis10, MKinTN

    Yes, Private Equity firms are different from VCs. Yes, vulture funds that take advantage of vulnerable businesses to loot them seven ways from Sunday are the worst of the lot. But to paint VCs, by comparison as somewhat better if not entirely good Samaritans is ridiculous. They are the same greedy bastards with the same Wall Street mentality, looking for any way they can to rig the game.

    If you want to understand how the VC game is rigged, there's an excellent documentary on the history of venture capital called Something Ventured.

    Here's the simple story. In the early days, venture capital was money put up by successful businessmen as investments in upstart technologies. It was "smart money"--money from people who knew the business and knew the technology, which not only meant they were making informed investments (as opposed to speculative bets), but they could help the investment succeed with their expertise.

    What changed in VC was a change in SEC regulations that had previously prevented Big Money from getting into the VC game. The so-called "reasonable man clause" prevented institutional funds and retirement funds from high risk investing, forcing them to keep their risk contained to that which a "reasonable man" would accept. With the wild success of ventures like Apple, lobbyists put on the pressure to kill that regulation, and the day it was killed, Wall Street descended on Sand Hill Road and vast amounts of money started flowing.

    No longer were VCs successful businessman who knew a line of business and a technology. Now they were money managers who knew how to pitch Cal-Pers for a piece of the 1-2% of their billions that could be put into high-risk deals. Make no mistake--they don't give a flying fuck about the company, the product, the entrepreneurs or the employees. They care about which way the wind is blowing, what bets they can make today on the Next Big Thing, and which turkeys they can dress up and dump onto the next sucker in follow-on round.

    Hardly any VCs today ever spent a day running an actual business, know nothing about the technologies they're investing in beyond what they read in white papers and product documents, and spend more time worrying about keeping their own investors happy than building a great product.

    If you think that's better than Vulture Capitalism, I would argue that's only a matter of the time frame with which you're looking at the market. Venture Capitalism has taken what started out as one of the best examples of what capitalism can produce--smart people investing in products they know and understand to build strong markets--and skewed it into a betting game that produces a few wildly successful winners, surrounded by a morbidly distorted market of poorly developed products and services. It is precisely the Wall Street mentality writ on Sand Hill Road--despite the veneer of swashbuckling entrepreneurship held-over from the early days to make it go down easy.  

    •  Even you are being too charitable to VCs (5+ / 0-)
      Recommended by:
      Cordyc, Minerva, tardis10, howd, MKinTN

      The emotional impact of founders being kicked out of their own companies....

      The fleecing of inventors of their "creative capital" in return for the mirage of "financial capital"...

      Less than 1 businessplan in 1000 submitted to VCs makes it to IPO. A few more of the 1000 end up in successful trade sales. Those are the only ones with "happy endings" (that is, until they get run thru the next ringer). The VCs kill off all the companies they finance that are only moderately successful, or below expectations. Plenty of unreported pain and suffering. But then there are the 99% of business plans that never get funded -- but serve to educate the VCs, give them well-researched business ideas that they are free to steal and then inject into their other favored ventures.

      75% of startup CEOs who do raise venture capital are pushed out and replaced with execs more to the liking of the investors.

      And don't even get me started on the mangling that happens to an idealistic, sustainability-committed, politically-progressive startup team along their way toward the emerald city of wall street IPO...

      #3: ensure network neutrality; #2: ensure electoral integrity; #1: ensure ecosystemic sustainability.

      by ivote2004 on Mon Jan 23, 2012 at 11:58:37 PM PST

      [ Parent ]

      •  Yup. (5+ / 0-)
        Recommended by:
        Cordyc, Minerva, tardis10, howd, MKinTN

        I could only scratch the surface.

        Certainly some things you can chalk up to the dog-eat-dog world of bare-knuckle business. But it's the blatant loading of the dice to systematically feed on entrepreneurs to fuel a betting game and IPO money-mill at the expense of building strong products and sustainable markets that pisses me off.

      •  Yes but ... (0+ / 0-)
        Less than 1 businessplan in 1000 submitted to VCs makes it to IPO.

        So I would ask how many of those that do attract early financing but don't make it to an IPO return value to the original investors. A majority do not, hence the risk involved and the fact that as a whole, VCs are not terribly profitable.

        Some are very profitable for a variety of reasons, including shark firms, but a lot lose and some go bankrupt. The streets are littered with former "Star" VCs.

        The firms you refer to are often the later-round VCs that come into the picture when the value created by the first and second round guys is in jeopardy and they sell-off to hedge their bets.

        Very few start-ups get to an IPO on a single round of financing.

        What about my Daughter's future?

        by koNko on Tue Jan 24, 2012 at 04:42:55 AM PST

        [ Parent ]

  •  These private equity firms (2+ / 0-)
    Recommended by:
    howd, MKinTN

    depend on someone to loan the business stacks of money. How do they manage to do that at credible rates,when the potential lenders must know the MO and that the loans will be dragging  the host company down (I like the parasite analogy).

    Some men fall in love with women. Some men fall in love with men. Some men and women fall in love with their money. We call them conservatives. Steve Bell

    by ewan husarmee on Mon Jan 23, 2012 at 11:52:21 PM PST

  •  The best part: Bankruptcy isn't even the end of it (3+ / 0-)
    Recommended by:
    koNko, Words In Action, MKinTN

    If everything is planned right, I imagine most firms still have something worth selling at the end of Bankruptcy.

    Friendly’s pension fund, [Marc Leder] said, was underfunded well before Sun Capital bought the company. The outcome, he added, is simply the way the bankruptcy process works.

    “We don’t make the rules,” he said with a shrug. He said the matter was settled with the agency for a “nominal” sum.

    Bankruptcy is never pretty. But, in this case, Sun Capital was particularly adept at getting what it wanted. Only months after Friendly’s went bankrupt, Mr. Leder has already regained control of the company.

  •  Romney's Bain Capital creates jobs... (0+ / 0-) a serial rapist creates babies. That is, it's a quick and violent process, only one side comes away satisfied, and if the victim gets anything out of it, it's completely by accident.

  •  What I find most intersting is that... (3+ / 0-)
    Recommended by:
    matx, Words In Action, MKinTN

    Mitt received 45 million  in 2010 without a job. I get how he got his money, but that says something about our society.

    I mean a person that goes to work each and every day, sometimes at more than one job can NEVER hope to earn that kind of money. Yet a multi-millionaire like Mitt can sit at home and "manage" his money and make 45 million. I am gobsmacked.

    Those who are willing to sacrifice liberty for safety deserve neither. (Paraphrasing B. Franklin)

    by p a roberson on Tue Jan 24, 2012 at 03:48:57 AM PST

  •  Mergers and Aquisitions - race to the bottom (3+ / 0-)
    Recommended by:
    mygreekamphora, MKinTN, jackson8

    My partner is in HR for a company that is held by a 3 person "holding company" - private equity.  Instead of growing the business by - oh, say, growing the business, they "grow" via mergers and aquisitions.  But her role in HR is to do due diligence on what salaries people are getting paid in the soon-to-be-bought company vs the existing ones.  And its always a race to the bottom.  Your benefits are too high - we have to get them in line with ours.  Your salaries are too high - we have to freeze your pay for years or take a pay cut.  Never the other way around...and they take that money and run.  If the company was profitable before it becomes really profitable later - until is slowly dies out.  But by then another buyer is there waiting to grab your company and the cycle continues and continues.  This is why M&A activity is a bell weather for crashes.  My faith in business leaders to actually know how to grow a business is slim to none.

    •  Been there, seen that (1+ / 0-)
      Recommended by:

      One would like to think the world was a more rational place. There's an acronymn from the financial crash IBGYBG that is so telling -- stands for "I'll be gone, you'll be gone" with the implication of "by the time the shit hits the fan."  Too much of business operates that way. Don't know whether it is the MBA culture or not, but it is extremely problematic.  We need to convince so called value voters that these are the values of the current Republican party. In this sense, the Democrats are the conservationists.

  •  The McClatchy link doesn't work. Can you fix it? (0+ / 0-)
  •  "financial engineering" (1+ / 0-)
    Recommended by:
    Words In Action

    I'm just guessing here, but it probably accounts for well over a third, perhaps about half of reported "wealth" worldwide.

    Too much of what is touted to be "success" seems to be one big game of Liar's Poker.

    When you are right you cannot be too radical; when you are wrong, you cannot be too conservative. --Martin Luther King Jr.

    by Egalitare on Tue Jan 24, 2012 at 05:41:37 AM PST

  •  Bain Venture Capital (1+ / 0-)
    Recommended by:

    Actually Bain DOES have a VC affiliate.

    Bain Capital Ventures

    I make my living finding capital for software start-ups and growth companies.  Bain has been a good partner over the years.

    The opposite of "good" is "good intention" - Kurt Tucholsky

    by DowneastDem on Tue Jan 24, 2012 at 06:55:39 AM PST

  •  Good example of why "over-financialization of (0+ / 0-)

    the economy" is cited, by Kevin Phiilips in "Wealth and Democracy", as one of the the three major empire killers. (The other two being over-concentration of wealth and military over-reach; note the echo of excess.)

  •  So, let me get this straight. Bain and others buy (0+ / 0-)

    a company that is making money, just not enough money, they borrow the money to buy the companies, pocket as much of the borrowed money as they can, and then walk away leaving the company to die.

    How is this at all different from Joe Sixpack going out and buying a bunch of stuff on credit and then declaring bankruptcy and keeping all the merchandise, something barely a handful of middle lower income people have done in the past, but has since been made unallowable by law?

    When it used to be allowable by the middle and lower class, it was considered a form of theft. What Bain and their ilk do ought also to be considered theft. It's mind boggling that this is legal. But the rich are pretty good about legalizing theft when they are the theifs.

    Ds see human suffering and wonder what they can do to relieve it. Rs see human suffering and wonder how they can profit from it.

    by JTinDC on Tue Jan 24, 2012 at 07:08:22 AM PST

  •  Extreme Private Equity Conduct (0+ / 0-)

    sounds illegal.  Fraud on lenders? Abuse of bankruptcy laws? Breach of employment contracts regarding pensions?  It looks very much like a form of theft.   I suppose the armies of lawyers private equity firms can afford to hire manage to keep their employers within the letter of the law, but it sure seems like some of the laws should be changed.  And then to give the marauders a mega-low tax rate.  Morally, if not legally, our society is being robbed.

    Let the Bush tax cuts expire.

    by Rona on Tue Jan 24, 2012 at 07:11:43 AM PST

  •  It's just like the Sopranos (0+ / 0-)

    Guy who owns sporting goods store gets in over his head at a Soprano poker game. Sopranos force him to max out his credit lines with suppliers, then they steal the merchandise and hire Africans to sell it on street corners. Store owner kills himself.

    "I am not interested in why man commits evil, I want to know why he does good (here and there) or at least feels that he ought to."
    --Vaclav Havel

    by drobnox on Tue Jan 24, 2012 at 08:53:00 AM PST

  •  I thought creditors could go back several years (0+ / 0-)

    If Bain (or any other PE) paid themselves and then the company went bankrupt - can't the creditors (i.e. the pension fund, banks and vendors) force Bain and anyone else who took cash out to pay it back through bankruptcy court?

    There are 10 kinds of people in the world, those who understand binary numbers, and those who don't.

    by j4k on Tue Jan 24, 2012 at 09:11:42 AM PST

  •  So Harry and David Got Bained? (0+ / 0-)

    Wondered what happened to them. Loved their stuff.

    Democrats are not always right, but Republicans are insane.

    by BobBlueMass on Wed Jan 25, 2012 at 05:27:01 PM PST

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