Friday, August 03, 2012
BROOKE GLADSTONE: On the heels of Mitt Romney’s swing through the outside world, now the political conversation swings back to jobs. Who makes them? Who breaks them? And which Bain Capital, which Romney cofounded in 1984, did or does? The debate goes back to the start of the campaign season. Here’s what former House Speaker and erstwhile Republican presidential candidate Newt Gingrich said:
NEWT GINGRICH: I would just say that if Governor Romney would like to give back all the money he’s earned from bankrupting companies and laying off employees over his years at Bain, that I would be glad to then listen to him.
BROOKE GLADSTONE: And here’s what Texas Governor and erstwhile Republican presidential candidate Rick Perry said:
RICK PERRY: Venture capitalists are good. They go in, they inject their capital; they create jobs. Bain Capital, on the other hand, it appears to me, were vulture capitalists all too often.
BROOKE GLADSTONE: Most times Bain Capital and Romney’s work in it is grouped under the private equity heading. Other times Romney is referred to as a venture capitalist, and Bain Capital as a venture capital firm. The Daily News has done that. So has the Christian Science Monitor, NPR, CNN and even “The Daily Show.”
MALE CORRESPONDENT: By, by nature, Mitt Romney is a venture capitalist. What he did for a living is competed with these government –
FEMALE CORRESPONDENT: — more than a third of registered voters said Romney’s tenure at the venture capital firm Bain Capital made their view of him less favorable.
JON STEWART: The hot political story at the moment is Mitt Romney’s old venture capital company.
BROOKE GLADSTONE: But Emily Mendell, vide-president of communications at the National Venture Capital Association, the lobbying group for the venture capital industry, doesn’t like it.
EMILY MENDELL: Every morning I get a list of clips that are following the campaign, and when I see a clip where a journalist, usually a political pundit, mischaracterizes Mitt Romney’s investments as venture capital, I send a really nice note to that reporter. [LAUGHS] It’s very straightforward, and it explains the difference between venture capital and private equity.
Venture capital starts and builds new companies from scratch. Private equity comes in and turns around mature companies, so companies that are having financial problems, need capital infusion, need a different strategy. It is a high-risk business, as it is in venture capital. So when a company closes, jobs are lost.
BROOKE GLADSTONE: For you, most of Romney’s work for Bain Capital should be characterized as private equity, right, even though Bain Capital has done some venture capital investing?
EMILY MENDELL: Romney did do some venture capital investments and did create jobs. But you are correct. The majority of investing he did while he was at Bain Capital would be considered private equity.
BROOKE GLADSTONE: So why do you feel the need to get back to journalists who make this mistake?
EMILY MENDELL: Because of the current political climate, there are going to be many people out there who are trying to attack Mitt Romney as a private equity professional, and they’re going to say that he killed jobs.
Now, whether or not you believe that, he was not a venture capitalist, and we don’t want any policymakers to become confused that venture capital isn’t creating jobs and isn’t fostering innovation.
BROOKE GLADSTONE: Give me an example of what happens when venture capitalists get confused with private equity people.
EMILY MENDELL: One in particular is Dodd-Frank. Legislators put venture capital, private equity, hedge funds all into a similar bucket and said, we need to make sure that these companies register with the SEC so that we avoid any future systemic financial risk. And you have to remember that venture capital firms are largely very, very small partnerships with, you know, maybe eight to ten people. They don’t have the resources to afford the SEC registration process.
So we went to work talking with legislators about the fact that venture capital does not create systemic financial risk. We don’t trade derivatives. We don’t use leverage or debt. And ultimately, they carved us out of Dodd-Frank legislation.
BROOKE GLADSTONE: Is it awkward going through this process? And I know you don’t want to throw your financial industry brethren in private equity under a bus.
EMILY MENDELL: We don’t want to throw private equity under the bus. Private equity has contributed a great deal to the US economy, but that’s not our story to tell. Our story to tell is the venture capital story.
BROOKE GLADSTONE: So would you want to jump at this point from representing venture capital to representing private equity?
EMILY MENDELL: I represent the white hats in the industry. I never worry about putting any of my venture capital members in front of any reporter because they have such a compelling story to tell. Venture capitalists are so smart and so engaged and so dedicated to building companies and helping entrepreneurs. You know, I never back down from a challenge but I think – I think the private equity folks have a tremendous challenge ahead of them, and I – I certainly wish them the best of luck.
BROOKE GLADSTONE: Thank you very much.
EMILY MENDELL: You’re welcome. Thank you.
BROOKE GLADSTONE: Emily Mendell is vice-president of communications at the National Venture Capital Association.
Daniel Gross is a columnist and global business editor at Newsweek Dailybeast. Daniel, welcome back to the show.
DANIEL GROSS: It’s good to be here.
BROOKE GLADSTONE: Okay, so what is the difference between private equity and venture capital, laid out neat and sweet?
DANIEL GROSS: So venture capital is cool.
These are people in California who wear khakis and maybe blazers. They invest in technology companies, biotech, clean technology, alternative energy.
BROOKE GLADSTONE: Where do they get their money?
DANIEL GROSS: They start with their own money or they raise a fund. They’ll go to pension funds and insurance companies, rich individuals, university endowments and say, we’ll take your money and we will spread it around among startup companies. We will probably them with money and with expertise and advice. They understand a fair number of them will fail, as a lot of dot-coms did but that when you really strike it rich, then you can get a return of 20, 30, 40 times, and that can make their fund worth a lot of money over time.
BROOKE GLADSTONE: So now move on to private equity.
DANIEL GROSS: Ohh!
This is an East Coast/New York phenomenon. These guys are former bankers. They wear suits. They look around for existing companies that may have run into trouble or that are having problems growing or that, you know, they don’t have a lot of debt so they could stand to take on a lot of debt — hotel companies, casino companies, restaurants, companies that make widgets. And they will go and buy that company, using a lot of debt to do so. If it makes sense to invest and grow the company to a larger size, they will do it.
But their goal is to get a return by selling the company down the road, or by having the company issue debt and pay themselves a dividend. If the company is doing poorly, they will let the company go bankrupt and default on its obligations to bondholders or workers. And that’s accepted in that industry. It doesn’t stop the banks from lending to these people in the future because, you know, on the aggregate they do pay back their debt.
BROOKE GLADSTONE: We’ve talked about how the media sometimes refer to Bain Capital and Romney as being in the venture capital business. Are they wrong?
DANIEL GROSS: Bain was something of a hybrid. Bain Capital did, in some instances, invest in very small companies that later became quite large - Sports Authority. Staples is the example that he likes to use the most. When Staples came across their desk, it was a very small company, and with their investment it grew much larger. That is much more typical of a venture capital investment.
On the other hand, they did a lot of traditional private equity deals, where they would go acquire an existing company, frequently load it up with debt to pay themselves a dividend. Some of those went bankrupt, and you see these in the – in the negative ads, some of the steel companies, industrial companies, where the workers came out quite poorly. Those were really traditional private equity firms.
So I think Bain is really a hybrid, probably more a private equity firm than a venture capital firm, but certainly for Romney’s purposes, he would much rather present himself to the public as a venture capitalist than as a private equity guy.
BROOKE GLADSTONE: So there’s a lot of attention on it during this political campaign. You think this is a, a fake issue, a red herring, or do you think it’s relevant?
DANIEL GROSS: No, I think it’s – it’s a very real issue. Romney does not talk much about his tenure as Governor of Massachusetts. His primary selling point is that he was a businessman, and the type of businessman he was, was primarily a private equity investor. So if you think that what he learned from private equity is translatable and is what the economy at large needs, then he’s saying you should vote for him. But private equity rolls in a sort of fundamentally different way than a lot of different businesses. They can make money, even as the company fails. That’s part of the culture of the business. That is not so much the culture of our political system today.
I mean, you’re going to have two counter-narratives. One is the Obama campaign wants to present Romney as a private equity guy, with all the negative connotations of that, right? They run companies into the ground, they profit even as the companies falter. They rely on this wrinkle in the tax code. It’s not sort of real business. It’s just financial engineering.
And Romney wants to present himself as a venture guy, someone who helps other people grow, that it’s not a matter of a zero- sum game but it’s really about enlarging the pie, creating jobs, etc. Now, they may not use these terms, “I’m a venture capitalist, no, you’re a private equity person.” But that’s, in effect, the difference that we’re talking about.
BROOKE GLADSTONE: All right. Dan, thank you very much.
DANIEL GROSS: Anytime.
BROOKE GLADSTONE: Daniel Gross is a columnist and global business editor at Newsweek Dailybeast.
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