Rick Perry’s Distortion of Venture Capital


by Richard H. Frank

Rick Perry needs a lesson in economics and the role of venture capital and private equity firms with regard to growth of our free enterprise system.

Private equity companies such as Bain Capital are in business to make a profit for their shareholders from the capital they invest in private enterprise.  Their mission is simply to “create value” through the free market system and eventually divest of their interests via a sale or IPO (initial public offering) in an effort to recoup their original investment at a profit.

Rick Perry would have you believe Bain Capital uses predatory means to acquire ailing companies for the sole purpose of looting their assets, destroying their capacity to produce at a profit and forcing them to liquidate through bankruptcy.  Any person with an ounce of business sense would consider Governor Perry’s explanation of venture capital as the height of stupidity.

With regard to Bain Capital I think I am more qualified than Rick Perry to talk about the process they employ for making a decision whether to invest in a particular company or enterprise as I actively participated with the Bain Capital process from 1995-1999.  Venture capital or private equity firms conduct exhausting due diligence investigations before making any decisions regarding a potential investment.  They are provided with hundreds of prospectuses from companies seeking venture capital.  Not all of these companies are distressed and facing eventual bankruptcy.  In fact, the opposite is true for many institutions seeking additional capital.  Many small companies that are profitable need new capital to expand, to increase market share, create new employment opportunities and create lasting value for their shareholders.  Others find themselves participating in a market that is over capacity and struggling to achieve a profit on their limited market share.  For these companies, buying out competition to make better use of existing capacity and eliminating duplication of overhead becomes their only road to survival and private equity firms play a larger role in achieving the objective of consolidation in some particular industry or market.  In the long term, this consolidation helps keep jobs in America.

Buying losers for the sake of bankrupting them in no way creates value in the market place nor a profit for investors.

The marketplace and potential growth is the ultimate criteria upon which companies such as Bain Capital make their decisions for investment.

My experience in dealing with Bain Capital proved to be both educational and rewarding.  The due diligence process extended over a period of four months and assessed every aspect of our business including our market segments and prospects for growth, financial performance for past years and future projections, strength of the management team, reputation with our customers and of utmost importance the ability to manage growth and change.

Between 1995 and 1999 with the financial backing of Bain Capital our business grew from  $300 million in sales to $1.2 billion.  The phenomenal growth came from a combination of acquisitions and organic market growth.  The process of consolidating capacity and elimination of duplicate overhead structures impacted approximately 300 positions across 5 states and 10 manufacturing locations while establishing upwards of 5000 highly paid positions for both union and non-union people.

Were it not for private equity firms such as Bain Capital, the industrial consolidation process in this Country would have been considerably more painful and much slower.

To be sure, Bain Capital had an exit strategy when they first invested in our industry.  That strategy included creating value for present and future shareholders from their initial investment, supporting growth through new capital from the sale of bonds and/or a future IPO.  And finally, divesting of their holdings at a profit when it appeared feasible to do so without impacting the company negatively.

According to Rick Perry, this is a portrait of “vulture capitalism.”  From my prospective, it is a portrait of the free enterprise system in action rewarding those who take a risk on the initiative and expertise of the American worker.

7 Responses

  1. Thank you, Richard. This makes the whole concept of venture capital and company’s like Bain understandable and humane. I worked for a company that did a lot of private equity work and I understand how much value they add to the economy.

    While I am not a Romney supporter (I believe there are better candidates), I don’t want him to be smeared with things that are totally untrue. His business experience is sound and would be of great value to the Presidency. He would be light years ahead of the travesty we now have in the White House.

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