You people hate Obama

[nathanm]

If not Bain, it would have been someone else.

Sorry if you got the impression that I think Bain should be singled out. The PE scam goes far beyond them. I also agree stakeholders like employees shouldn't get decision making power over the business (unless they buy it through an ESOP or something). However, their interests should be considered. When you buy a company and run it into the ground with a crushing debt load you placed upon them, you're making money by screwing them (and the surrounding community).

I work for a guy who buys failing companies in a certain industry and turns them around. He usually has to cut jobs for a while to do it, after all, the reason he buys them is because they're losing money. If they were making money, their owners wouldn't want to sell. So he eliminates some redundant positions, invests in equipment that allows the operation to run more efficiently, and beefs up the sales staff to increase volume and away they go (usually). He does not force his companies to take out large loans to pay off the loans he took out to buy the operation in the first place.

Point being that there are non-scammy ways to do what PE firms do.

[erfalf]

Sorry if you got the impression that I think Bain should be singled out. The PE scam goes far beyond them. I also agree stakeholders like employees shouldn't get decision making power over the business (unless they buy it through an ESOP or something). However, their interests should be considered. When you buy a company and run it into the ground with a crushing debt load you placed upon them, you're making money by screwing them (and the surrounding community).

I work for a guy who buys failing companies in a certain industry and turns them around. He usually has to cut jobs for a while to do it, after all, the reason he buys them is because they're losing money. If they were making money, their owners wouldn't want to sell. So he eliminates some redundant positions, invests in equipment that allows the operation to run more efficiently, and beefs up the sales staff to increase volume and away they go (usually). He does not force his companies to take out large loans to pay off the loans he took out to buy the operation in the first place.

Point being that there are non-scammy ways to do what PE firms do.

There are, and there are non-scammy PE firms out there too.

I'm kind of naive in this regard often in that I believe that people usually have the best intentions. That being said, people that start, grow, and build there own businesses often want the best for their companies. Unfortunately best intentions do not always create success. Maybe being bought out was the best solution. Sad but true I am sure in many cases. PE firms offer one thing, CASH. It is what it is. Some, like Venture Capital (which I am more familiar with) offer expertise and guidance as well. Of course VC is often taking an idea and trying to turn it into something profitable. I've also worked for a tad less desirable PE firm who bought Real Estate and struggling companies. And unfortunately, the struggling companies often remain so. The turnaround success rate is definitely less than half, but it does happen. And I don't think any of the deals were done just to shut them down. Although shutting down some business units within a company is sometimes necessary to regain profitability. It's kind of like a bunch of the government programs. I would argue that many are not necessary, but it would hurt real bad for some to just stop them right now. A failing company will have made some bad decisions, correcting them is not always a pleasant task.

I think you and I agree that there is a market for this sort of thing. I don't know about you, but I really don't view Romney's time at Bain as a particularly bad thing. Many good and decent people work in the industry. No reason to let a few bad apples spoil the bunch.

[nathanm]

I think you and I agree that there is a market for this sort of thing. I don't know about you, but I really don't view Romney's time at Bain as a particularly bad thing. Many good and decent people work in the industry. No reason to let a few bad apples spoil the bunch.

I think our main point of contention here is the frequency of the "bad" deals. I think most of their deals are bad deals (for the company, not the PE firm), even when they end up working out through some miracle. I guess my biggest problem is that the deals are often structured to reduce or even eliminate any real incentive the PE firm might have to care about the long-term health of the business.

I don't think that the short term focus is exclusive to PE, mind you. It's pretty much a universal problem in our society at the moment.

[Conan71]

Sorry if you got the impression that I think Bain should be singled out. The PE scam goes far beyond them. I also agree stakeholders like employees shouldn't get decision making power over the business (unless they buy it through an ESOP or something). However, their interests should be considered. When you buy a company and run it into the ground with a crushing debt load you placed upon them, you're making money by screwing them (and the surrounding community).

I work for a guy who buys failing companies in a certain industry and turns them around. He usually has to cut jobs for a while to do it, after all, the reason he buys them is because they're losing money. If they were making money, their owners wouldn't want to sell. So he eliminates some redundant positions, invests in equipment that allows the operation to run more efficiently, and beefs up the sales staff to increase volume and away they go (usually). He does not force his companies to take out large loans to pay off the loans he took out to buy the operation in the first place.

Point being that there are non-scammy ways to do what PE firms do.

Is there some indication that Bain does it the “scammy” way every time? 

[guido911]

Okay. It's been about 5 days now. I am officially SICK of SSM and all things gay for a while. Who's with me???

[erfalf]

Is there some indication that Bain does it the “scammy” way every time? 

No, they are an extremely well respected, well capitalized company. They are far more diversified than just buyouts.

If a company were to continue scamming people, they would go out of business. Trust me, Bain didn't become Bain by being shady. Skirting morals doesn't lend itself to longevity in PE, because you often do business with the same crowd over and over.

[Conan71]

No, they are an extremely well respected, well capitalized company. They are far more diversified than just buyouts.

If a company were to continue scamming people, they would go out of business. Trust me, Bain didn't become Bain by being shady. Skirting morals doesn't lend itself to longevity in PE, because you often do business with the same crowd over and over.

So essentially, it’s just easier to spread innuendo and outright misinformation about Romney and toe the party line rather than admit to the failures of Obama and consider the possibility that Romney might just have a better grasp on how to turn the economy and jobs situation around.

[nathanm]

If a company were to continue scamming people, they would go out of business. Trust me, Bain didn't become Bain by being shady. Skirting morals doesn't lend itself to longevity in PE, because you often do business with the same crowd over and over.

You're (incorrectly) assuming that the people being scammed are people who have any say in the process.

Beyond the broad outlines and the few deals regarding which details have been leaked, these deals are usually kept quiet. Not necessarily out of any nefarious intent, but for the same reasons most private companies don't make much financial information public. The point being that it's really not possible to say what percentage of the deals are "scammy." Assuming that all the deals that haven't attracted attention were kosher is equally as misguided as assuming that they all were scamming somebody.

All we really know for sure is that many PE firms have done some deals that maximize short term profit for the firm at the expense of the long term viability of the purchased company. Bain happens to be one of them. I don't personally think that someone who worked in that field has the right mindset to be President. Being President is largely about setting aside what it is that you want in favor of doing what the country needs.

Romney's experience would be relevant if we were planning to do an LBO of China.

[erfalf]

You're (incorrectly) assuming that the people being scammed are people who have any say in the process.

I think we went over this. Only a small majority of deals are takeovers. Most are agreed upon by both parties.

Beyond the broad outlines and the few deals regarding which details have been leaked, these deals are usually kept quiet. Not necessarily out of any nefarious intent, but for the same reasons most private companies don't make much financial information public. The point being that it's really not possible to say what percentage of the deals are "scammy." Assuming that all the deals that haven't attracted attention were kosher is equally as misguided as assuming that they all were scamming somebody.

Details are private because it has to be. There are plenty of dollars chasing every deal. If PE firms were blabber mouths they would be out of business. Besides it's a private matter unless regulations state otherwise. I think it is good policy to keep it that way. I think you are buying into this whole PE Bad business that is just rooted in ignorance. People think that because some people got rich it must be inherantly bad. It's not. People are bad. The business model isn't. If I had to guess what percentage deals are "scammy" I would say well below 10%. You are making the false assumption that every company that a PE firm buys is viable. They are not. If I had to estimate the success rate in Venture Capital (a different strategy), I would say that only about 25% of the portfolio companies are still open in 10 years. Does that mean that they are evil money grubbing businesses? No. It means that about 75% of the start-ups got money that shouldn't have. But hind sight is 20/20. They take the risk, they get the reward. Again, PE is not inherently evil.

All we really know for sure is that many PE firms have done some deals that maximize short term profit for the firm at the expense of the long term viability of the purchased company. Bain happens to be one of them. I don't personally think that someone who worked in that field has the right mindset to be President. Being President is largely about setting aside what it is that you want in favor of doing what the country needs.

Romney's experience would be relevant if we were planning to do an LBO of China.

Again, you are mistaken in making the assumption that all PE firms are looking for the quick fix. They are looking to maximize profit, as should any reputable business. If that means a quick turnaround, fine. If it means longevity, they will do it. I understand there is pressure on them to produce returns. But they will not just sell to the first bidder I promise. They are going to position their assets for the highest possible return.

I don't agree. We need a slash and burn (efficiency creator) type President now more than ever. You can't disagree that our federal government is just getting too bloated and spending money on things that have no relevance to running our country. The current occupant is the complete opposite of efficiency. Funny you even say that the President is about setting aside what you want in favor of what the company needs. PE is probably the most effective industry in the world at cutting through the crap and doing what needs to be done, regardless of the poll numbers. They do what is right.

I remember an interview with the Home Depot guy. He was discussing criticism about his firm putting little guys out of business. He basically said that they deserved it and if he were running a business that was so poorly run that they couldn't stand some competition, it would be his own fault if he couldn't stay open. If businesses provide a product/service that is desirable, they would have stayed open. I mean they didn't put everyone out of business, only the marginally run ones. Should we feel sorry for them?

[nathanm]

I think we went over this. Only a small majority of deals are takeovers. Most are agreed upon by both parties.

Yes, we've been over this. It's not the company's previous owner that is getting screwed. If they were, they wouldn't sell. People aren't stupid. Workers, the community, and the buyers of the bonds are the ones who get smile on. It's very similar to the CDO scam.

If I had to estimate the success rate in Venture Capital (a different strategy), I would say that only about 25% of the portfolio companies are still open in 10 years. Does that mean that they are evil money grubbing businesses? No. It means that about 75% of the start-ups got money that shouldn't have. But hind sight is 20/20. They take the risk, they get the reward. Again, PE is not inherently evil.

Aside from a few large VC firms, they all lose money for their investors (and the fees charged to investors keep them open), but the investors keep coming back for more. I don't know if they just see Facebook or whatever and see dollar signs or what, but the stats are out there and quite sobering. I understand how it works, though. You bet a relatively small sum on a lot of companies in exchange for a relatively large equity stake and one or more positions on the board of directors, and if it goes well you either invest more or IPO the company, which gets you millions in fees even if the share price isn't what you'd like it to be.

I don't agree. We need a slash and burn (efficiency creator) type President now more than ever. You can't disagree that our federal government is just getting too bloated and spending money on things that have no relevance to running our country. The current occupant is the complete opposite of efficiency. Funny you even say that the President is about setting aside what you want in favor of what the company needs. PE is probably the most effective industry in the world at cutting through the crap and doing what needs to be done, regardless of the poll numbers. They do what is right.

Ok, this may be our fundamental disagreement. What is right and what makes money are often two very different things. Sometimes it's a tradeoff between what is right and what makes more money.

I remember an interview with the Home Depot guy. He was discussing criticism about his firm putting little guys out of business. He basically said that they deserved it and if he were running a business that was so poorly run that they couldn't stand some competition, it would be his own fault if he couldn't stay open. If businesses provide a product/service that is desirable, they would have stayed open. I mean they didn't put everyone out of business, only the marginally run ones. Should we feel sorry for them?

The Home Depot guy is a moron if he really said that. His company gets enormous tax breaks to build new stores. Tax breaks paid for by their effin' competitors! Of course Home Depot is going to look well run with government's thumb on the scale. Could you compete if you were paying your competitors to open new stores?

[youtube]http://www.youtube.com/watch?v=ILdRxjrja9A[/youtube]

[Conan71]

Not to oversimplify, but PE firms are really only one step removed from the concept of junk bonds or “B” loans.  For the amount of risk involved, there has to be a big return because the rate of failure and charge offs is a whole lot higher than there is underwriting an IPO for listing on NYSE or NASDAQ.

Without PE firms, there are a lot of companies which would not exist today. 

If you can’t go to a conventional lender or through conventional financing processes because the risk is too high for them, you end up dealing with loan sharks.  Sometimes companies recover from having to go to those depths sometimes they don’t.  Do you blame the original owner of the company for not simply shutting down, filing bankruptcy, and releasing all his/her workers and selling to a PE firm who kept many of those workers on payroll for another 5-10 years?

Bash on them all you want but there’s always a need for alternative credit sources in every level of society and business.  The reward is always much greater for those willing to take the biggest risks.  That’s been a core tenet of investing as long as there’s been civilized society.

[nathanm]

Not to oversimplify, but PE firms are really only one step removed from the concept of junk bonds or “B” loans.  For the amount of risk involved, there has to be a big return because the rate of failure and charge offs is a whole lot higher than there is underwriting an IPO for listing on NYSE or NASDAQ.

It's a mistake to confuse the rating of the bonds they issue in the name of the purchased company to pay themselves back for the purchase price and the prior financial viability of the company. People sell their businesses all the time, often for reasons that have nothing to do with profitability or lack thereof.

[guido911]

Well, there's this for levity in this thread...

[Townsend]

Well, there's this for levity in this thread...

That's a good one.

[nathanm]

And for more on how we're living in a country that is more than happy to practice socialism as long as the benefits accrue to big political donors:

http://www.pbs.org/moyers/journal/01182008/watch.html (note the date)