Mitt Romney, American Parasite, Destroys America’s Mittelstand
Speaking of “extractive elites,” don’t miss Pete Kotz’s cover story in the Village Voice, Mitt Romney, American Parasite. (I read it in their subsidiary Seattle Weekly.)
It details a whole string of Bain purchases under Romney — thriving companies that were saddled with debt so Romney could extract cash in the form of “profits,” leaving the companies to devolve into bankruptcy and dissolution.
Just one example:
“When Bain Capital took over, it seemed like everything was being neglected in our plant,” says Sanderson. “Nothing was being invested in our plant. We didn’t have the necessary time to maintain our equipment. They had people here that didn’t know what they were doing. It was like they were taking money from us and putting it somewhere else.”
History would prove him correct. While Georgetown was beginning its descent to bankruptcy, Romney was helping himself to the company’s treasury.
Be very clear on this: that is the business model of private equity:
Charlie Hallac, a top deputy to Larry Fink at BlackRock and head of the firm’s analytical arm, BlackRock Solutions, distilled it down with precision: “Of every twenty deals, the large aggressive PE firm expects seventeen of the companies to fail under the added debt. Two have to survive and one has to hit big for the firm to have a fairly strong return on its PE fund. So that’s three out of twenty.”
The whole purpose of the private equity industry is to destroy the kind of mittelstand, long-lived, profitable, specialized, often family-owned and -operated companies that The Economist, Business Week, et al keep touting as the backbone of Germany’s remarkable success and resilience — its very “model of success.” Private equity’s model is to extract the expected future value of those companies in cash, while simultaneously, in most cases, destroying that value.
Is that what they mean by “creative destruction”?
But here’s the question that keeps nagging at me: who lends them the money? Presumably savvy financial-system lenders know that a large percentage of these companies are going to go bankrupt and walk away from their creditors. Why do they lend the money? I’m thinking it must be an principal-agent problem, where the individuals approving the loans make out well, while the companies they work for (and their shareholders, and taxpayers) take the hit.
Cross-posted at Asymptosis.
i think if you look into it you will find that the people who lend them money make money on the deal. And the reach of financial industry is deep. Guess who owns Romney, Obama, and the Fed.
“that is the business model of private equity“
… except it’s not, really (or isn’t so much these days). Allow TED to explain:
And in case anyone can’t be bothered to read the link:
“Levering up businesses with huge amounts of debt and making your equity returns primarily from the paydown of debt with excess cash flow was the old model of the leveraged buyouts of the 1980s. It only worked then because private equity firms could get businesses cheaper than they can now. Fierce competition has shut this sort of financial engineering down.”
… in part because …
“sell-side advisors and investment bankers like Yours Truly do everything in our power to prevent any buyer, financial sponsor included, from buying companies cheaply. Much to private equity’s chagrin, we have gotten pretty good at it.”
Your assumption at the end of the post is dead-on…
There’s always money to be made in liquidation. You could even make money liquidating Apple. They have the cash reserves and cash flow to pay for their own buyout, and there would be plenty left for an enterprising scavenger. It would probably take a full five or ten years to strip the carcass. (In fact, I think Apple’s recent dividend declaration was an attempt to deflect such a take over.)
Sadly both the time scales involved and the widespread self-dealing of corporate management make this dubious. The mere existence of debt issued to pay PE investors back “dividend recaps” shows that the judges have gutted the doctrine of fraudulent conveyance.