It’s important that people understand what “private equity” firms really do. You’ll often hear Mitt Romney say that to attack his time as CEO of Bain Capital is on par with attacking “free enterprise” everywhere. Of course – the reason that Mitt Romney uses the words “free enterprise” instead of “capitalism” and thusly “trickle down economics” is because Frank Lutz says that “free enterprise polls better … and no I’m not kidding (source). It’s important to note that Romney still maintains a partnership in Bain Capital and received unknown millions from this deal.
This is how Mitt Romney made tens of millions … the Burger King story is instructive in how the private equity model works.
- They put down less than 15% in cash as a down payment on the deal and borrowed the rest.
- They start to charge the newly purchased company a healthy premium for “management and consulting fees” taking valuable resources that were needed to compete with McDonalds and others.
- Being in control of the company – they borrow money that they use to pay themselves a HUGE dividend.
- Then they take the company public and still maintain a majority ownership while raising money to pay themselves.
- Then they sell it for double the profit because they bought it at a vulnerable point.
- They pay their workers minimum wage or nearly minimum wage.
- They cut on quality of food serving meat like products
- They do not pay benefits for most of their employees thus pushing those costs on to government.
- They ring out additional costs from franchisees (small business owners) in order to suck every $$$ out
The NY Times tells the story of how private equity groups made millions off of investments like Burger King HERE:
Enter — ta-da! — private equity. In 2002, Goldman Sachs, along with two private equity firms, TGP and … hmmm … Bain Capital, teamed up to buy Burger King. This is exactly the kind of situation private equity firms like to trumpet: taking over a downtrodden company and nursing it back to health. And to get them their due, Burger King’s new owners did some good, stabilizing both the company and the franchisees, many of whom were in worse shape than Burger King itself.
But the private equity investors also cut themselves an incredibly sweet deal. Their $1.5 billion purchase price included only $210 million of their own money; the rest was borrowed. They immediately began taking out tens of millions of dollars in fees. Four years later, they took Burger King public. But, first, they rewarded themselves with a $448 million dividend. In all, according to The Wall Street Journal, “the firms received $511 million in dividend, fees, expense reimbursements and interest” — while still retaining a 76 percent stake.
Does it need to be said that Burger King was soon back to its old struggling self? Or that the solution, once again, was to sell to another private equity firm? Of course not! In 2010, Bain, Goldman and TPG cashed out, selling Burger King to 3G Capital, for $3.3 billion. In sum, the original private equity troika reaped a fortune by selling a company that was in nearly as much trouble as it had been when they first bought it. Surely this represents the apotheosis of financial engineering.
Forbes adds HERE:
Where do Bain Capital’s profits come from? Consider its investment in Burger King. In May 2006 Bain Capital and others took a $30 million “management termination fee” out of Burger King before taking it public. (This fee was chump change compared to the $367 million dividend Bain Capital and its partners extracted from Burger King in February 2006.)
Sure this happened after Romney had left Bain Capital and such fees do not get sucked out of every deal.
But the point is clear, if you want a President who knows something about creating jobs, vote for a venture capitalist, not a private equity honcho.
