Years ago when I was finishing up my MBA, I wanted to be a Management Consultant so I did ton of research on potential companies that I could send resumes to. Bain & Company was on that list, among others. So tonight I finally decided to see what the connection was between Bain & Company and Bain Capital. I hadn't bothered to look up the history until now and as I started reading through the wiki entries on both companies, I noticed some interesting things.
So I decided to throw this diary together and put it out there to see if anyone has any further insight into the goings-on behind Bain Capital's creation and where the money came from and if Bain Capital was possibly created as a vehicle to transfer partner cash from a struggling Bain & Company to be protected in Bain Capital.
More below the squiggle.
I'll try to keep this simple but what struck me initially was the timeline. (All bolding is mine.)
From the Bain & Company wikipage:
After a successful start, Bain & Co. found itself facing a growing list of challenges in the late 1980s. In the midst of sluggish business conditions and overstaffing, Bain also faced the dilemma of having to turn away business due to its one-client-per-industry restriction. Competition increased as other firms copied Bain’s implementation-focused strategy.
However daunting these external challenges, it was internal in fighting among the senior partnership that threatened to tear the firm apart. In response, Bain & Co. was formally incorporated in 1985 and, over the course of two years, an Employee Stock Ownership Plan (ESOP) was established. Bain's senior partners began borrowing against their equity for cash, eventually leaving the firm with a heavy debt load.
As business slowed, this debt load began to squeeze the firm. Bain ultimately found itself in non-compliance with Bank of New England loan covenants. The resulting debt write-off at the Bank of New England eventually resulted in that bank's failure in 1991.
Facing financial duress, Bain Capital partner Mitt Romney was asked to rejoin and lead Bain & Co. as interim CEO. Bringing along two lieutenants from Bain Capital, Romney began a traveling campaign to rally employees at all Bain offices globally. Romney also negotiated a complex settlement between the Bain partnership and the firm's lenders, including a $10 million reduction in the $38 million Bain owed the Bank of New England, which by that time had been seized by the FDIC and placed in Chapter 7 liquidation. Romney was able to negotiate this reduction in the debt amount with the FDIC by threatening to use the remaining cash that Bain had on hand as bonuses for Bain executives. Bain & Company paid Bain Capital a fee of $4 million for Romney's services. To avoid the financial crisis that a buyout would have triggered, the group of founding partners agreed to return about $100M cash and forgive outstanding debt.
Now from the Bain Capital wiki
Bain Capital was founded in 1984 by Bain & Company partners Mitt Romney, T. Coleman Andrews III, and Eric Kriss, after Bill Bain had offered Romney the chance to head a new venture that would invest in companies and apply Bain's consulting techniques to improve operations. In addition to the three founding partners, the early team included Fraser Bullock, Robert F. White, Joshua Bekenstein, Adam Kirsch, and Geoffrey S. Rehnert. Romney initially had the titles of president and managing general partner or managing partner. He later became referred to as managing director or CEO as well. He was also the sole shareholder of the firm. At the beginning, the firm had fewer than ten employees. When new employees were hired, they were generally in their twenties and top-ranked graduates from Stanford University or Harvard University, both of which Romney had attended.
In the face of skepticism from potential investors, Romney and his partners spent a year raising the $37 million in funds needed to start the new operation. Early investors also included members of elite Salvadoran families who fled the country's civil war. They and other wealthy Latin Americans invested $9 million primarily through offshore companies registered in Panama.
While Bain Capital was founded by Bain executives, the firm was not an affiliate or a division of Bain & Company but rather a completely separate company. Initially, the two firms shared the same offices - in an office tower at Copley Place in Boston - and a similar approach to improving business operations. However, the two firms had put in place certain protections to avoid sharing information between the two companies and the Bain & Company executives had the ability to veto investments that posed potential conflicts of interest. Bain Capital also provided an investment opportunity for partners of Bain & Company. Bain Capital's original $37 million fund was raised entirely from private individuals in mid-1984. The firm initially gave a cut of its profits to Bain & Company, but Romney later persuaded Bill Bain to give that up.
Bain Capital was an initial investor in Staples, Inc.
The Bain Capital team was initially reluctant to invest its capital. By 1985, things were going poorly enough that Romney considered closing the operation, returning investors' money back to them, and having the partners go back to their old positions.
So what happened here? Bain & Company were having financial difficulties in 1984. The Partners no doubt were concerned about their equity in the company leading to "partner infighting". Then Bain Capital is created as a separate company, raises $37 million from private individuals which included Bain & Company Partners by the way it reads. Bain & Company then incorporates and the Partners start taking cash out for their equity to the tune of $38 million leaving Bain & Company with a serious debt problem that they financed with the Bank of New England. Then Bain & Company couldn't make the loan payments and were in non-compliance to the bank, the debt was written off and this led to the failure of the bank. Then Romney comes back and gets the $38 million owed reduced to $28 million and agrees to a settlement with threats and walks away with $4 million in his pocket for his "services". The Bain & Company partners returned $100 million cash (which was easily made during the 5-year period Bain Capital was investing the initial $37 million in companies such as Staples) and forgave debt to avoid a buyout. Now 70 partners own Bain & Company.
Although in the role for just one year before returning to Bain Capital, Romney's work had three profound impacts on the firm. First, ownership was officially shifted from the owners to the firm's 70 general partners. Second, transparency in the firm's finances increased dramatically (e.g. partners were able to know each other's salaries). Third, Bill Bain relinquished ownership in the firm that carried his name.
Am I totally off my rocker or is there something fishy here involving some, if not all, of that $37 million that started Bain Capital? Did money ever really change hands? Or was this whole thing just some convoluted method of moving paper money around in some bizarre scheme? And why on earth would Bill Bain do any of the things he did?
Admittedly, this is pure speculation here. I certainly don't have the resources to dig deeper and find out more information. But I certainly find it curious...
UPDATE: Upon further googling, I came upon this fabulous article by Rolling Stone which touches on much of the details of what went down here. Read it if you haven't already, it's quite fascinating!