Monday, January 16, 2012

Do investors place too much emphasis on growth? The case of Bain Capital

Is there too much of a growth emphasis in the stock market in the business world and in the private equity corner in particular?  That is the argument that Felix Salmon is giving in his recent article for Wired.  He was writing with respect to claims by Mitt Romney that Bain Capital (a private equity fund which Romney was CEO) created 100,000 jobs.  (It is a number on which there is much debate as some of the companies that Bain purchased later went out of business.)  Politics aside, what I find interesting is this part on the importance of growth:
"Romney’s company, Bain Capital, was a “private equity” firm — the friendly, focus-grouped phrase which replaced “leveraged buy-outs” after Mike Milken blew up. But at heart it’s the same thing: you buy companies with an enormous amount of borrowed money, and then dividend as much money out of them as you can. If they still manage to grow, you can make a fortune; if they don’t grow, they’ll likely fail, but even then you might well have made a profit anyway.
Private equity companies need growth, because they’re built on the idea of buying, restructuring, and then selling. They’re never in any business for the long haul: instead, they want to make as much money as they can as quickly as possible, sell out, and keep all the profits for themselves and their investors. When you sell, you want to maximize the price you can ask — and the way to do that is to show healthy growth. No one will pay top dollar for a company which isn’t growing."

The article goes on and discusses why this is so and even a reluctance by managers of all firms to admit they are not prospering.  I would definitely recommend reading it--Here.

What makes this even more troubling is that in the Private Equity heyday of 2005-2007, the ability and freedom to think and act as long term investors was often cited as a reason for their success.  (it should be noted that Romney left Bain Capital in 1999)

BTW here is more on Bain Capital from NPR.

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