January 24, 2008 / 12:34 PM / 12 years ago

Private equity past may cloud Romney's jobs pitch

NEW YORK (Reuters) - Recalling his days as a businessman, Republican U.S. presidential contender Mitt Romney often cites the 25 years he spent in the private sector creating jobs.

But as the leader of private equity firm Bain Capital from 1984 to 1999, Romney’s record shows that while some of the firm’s investments helped companies grow, others ended in thousands of layoffs, and in some cases, bankruptcy.

Layoffs are a common result of private equity takeovers, with Bain Capital no exception. Although Romney is credited with helping make Bain the private equity powerhouse it is today, buyout firms are known more for cutting jobs — not creating them.

“I believe most Americans want their next president to remind them of the guy who they work with, not the guy who laid them off,” Republican rival Mike Huckabee said in a campaign ad and in many campaign speeches.

Companies such as office supplier Staples Inc. and pizza company Domino’s were successful Bain investments under Romney.

But medical test maker Dade Behring, circuit board maker DDi, American Pad & Paper and auto parts company Cambridge Industries are among the companies that went bankrupt after Bain invested in them with Romney at the helm.

“The bottom line of a private equity buyout is not to create jobs. The point is to make money,” said Marisa DiNatale, senior economist at Moody’s Economy.com. “In many cases, the point is to pare down the company and make it run as efficiently and as profitably as possible. Oftentimes that includes cutting jobs.”

Private equity firms buy companies by borrowing most of the money, and sell them later, keeping about 20 percent of the profit on the sale and giving the rest back to their institutional investors.

Romney worked as a consultant at Boston-based Bain & Co before he was tapped to run Bain Capital. The firm started out with more of a venture capital strategy and later moved more toward traditional leveraged buyouts.

The private equity model is built on loading companies up with debt — which can ultimately prove too heavy a load for the business, as was the case with DDi.

Bain invested $46 million in DDi in October 1997 and later sold shares worth at least $93 million, according to a report by the Orange County Register newspaper. The Anaheim, California, company ultimately went bankrupt, laying off 2,100 employees.

FIX-IT MAN

Cutting costs is a basic ingredient of a leveraged buyout, as private equity firms need to wring out profits and boost cash flows to pay down debt payments.

DiNatale points out a private equity-owned company may see job growth later on in the investment, should the company expand. Staples, in which Bain was an early investor, now has 74,000 employees, and more than 2,000 stores, according to a recent press release.

What private equity executives often seek credit for is not boosting payrolls, but boosting pension funds for retired state employees. Pension funds are among the largest private equity investors. Under Romney, a $37 million Bain investment fund returned $200 million to institutional investors, according to a Boston Globe profile of Romney.

Bain Capital is currently investing more than $10 billion.

Romney is also a well known fix-it man, credited with stabilizing troubled entities such as the Salt Lake City Olympics and Bain & Co itself when the consulting firm was struggling.

His more than two decades in the business world leave him well versed in the economy, at a time when there are fears of a U.S. recession.

“I won’t need briefings on how the economy works. I know how it works,” Romney said in Sarasota, Florida, on Wednesday. “I’ve been there, and I think it’s time to have a president who thoroughly understands the economy, understands jobs, knows why jobs come and go, knows how we can be competitive around the world.”

Romney knows a lot about the economy, says a former Bain Capital employee who worked under him. But on the topic of jobs, he says Romney was never one to put expanding a company’s payroll ahead of keeping costs low.

“It’s fair for him to claim that he spent 20 years of his life in the private economy. And therefore he understands what makes businesses succeed and fail,” said the former Bain employee, who did not want to be identified. “But that’s different from saying he was in a position to oversee job creation as a whole. Bill Gates grew a business from scratch. That’s not what you do in private equity. You’re an investor.”

Additional reporting by Jason Szep in Florida and Ed Stoddard; Editing by Peter Cooney

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