The Truth about Bain Capital
Image: Peter Horvath for Forbes; Photographs: Getty Images
mong the private equity deals of this century, HCA stands among the very best. Bain Capital partnered with KKR and Merrill Lynch to buy the hospital chain for $33 billion in November 2006. Bain invested $1.2 billion for a 25 percent stake and recovered almost all its money with a trio of special dividends in 2010. The Boston ﬁrm pulled out another $457 million when HCA went public again in March 2011 and still owns shares worth almost $3 billion. Despite the ﬁnancial crisis and periodic whiffs of scandal swirling around the for- proﬁt hospital chain, HCA is worth 26 percent more today than it was seven years ago, and Bain investors have more than tripled their money.
If only they could all turn out like HCA. But they haven’t. Not even close. Actually, few of Bain’s biggest deals since buying HCA have panned out so far, leaving it with a decidedly middling recent investment record far outstripped by its mythology. Bain Capital has endured more dissection, debate and criticism this year than any ﬁrm in the half-century-old history of private equity, owing to its founder, Grand Old Party (The Republican Party) presidential candidate Mitt Romney, who launched the ﬁrm in 1984. While the White House and Romney focus on Bain’s job-creation record, no one has gauged the ﬁrm using industry-standard metrics to see how well it has performed in its core mission: Making money for its partners and investors.
An exclusive analysis of the ﬁrm’s returns by Forbes reveals that despite the hype surrounding Bain, investors in the ﬁrm’s biggest funds, raised in 2006 and 2008, would have been better off in a simple stock index fund. While Bain churned out serious returns for partners and investors during Romney’s tenure, it’s that reputation, rather than results, that has carried Bain for the past decade. Stephen Pagliuca, managing director, Bain Capital, defends the ﬁrm’s record: “We are in the business of being long-term right.” Over the past three months, Forbes dug into the ﬁnancial performance of every company Bain has invested in for the past decade, and the returns of its funds that raised some $42 billion in capital and commitments since Romney stopped working there in 1999. We also spoke to some of Bain’s competitors and analysts, to understand how the ﬁrm does business. What we found:
• • While funds raised through 2004 maintained the upper-quartile performance, returns for later funds—their biggest—have lagged as the company engineered multi-billion-dollar buyouts of fragile consumer-dependent companies like Toys “R” Us, Burlington Coat Factory and Guitar Center at the peak of the 2005-08 private bubble. Those investments may yet recover, but they speak to a culture where reverent faith in decades-old techniques, rooted in consulting, have not kept pace with a new age of dealmaking.
• • Bain exemplifies a worrisome trend for private equity as a whole. Megashops like Bain, with tens of billions to deploy and an insatiable need to buy, make proﬁtable exits increasingly difficult. Mix in the meltdown and the tepid recovery, and you’ve got a toxic brew for investors, which include some of the nation’s largest pension funds.
Clear Channel Communications epitomises all three of these issues. Bain and buyout ﬁrm Thomas H Lee Partners bought the nation’s largest group of radio stations for $24 billion in July 2008, including $2.1 billion in equity, just in time to watch the advertising market collapse along with the US economy. Loaded with $21 billion in debt and a $1.5 billion annual interest tab, Clear Channel barely earns enough to cover its interest payments and capital expenditures. And even giving it an Ebitda multiple akin to the far more proﬁtable Disney, for example, the company is worth perhaps 70 percent of what Bain paid for it. “It’s extremely, extremely levered—it was one of the last deals done during the bubble,” says Karen Klapper, a debt analyst with CreditSights. Her appraisal of Bain is the ultimate back- handed compliment: “They’re doing a good job managing their balance sheet and pushing out maturities so they don’t go into bankruptcy.”
Avoiding bankruptcy wasn’t the goal when 37-year-old Romney established Bain Capital in 1984. With the encouragement of Bill Bain, Romney and two other Bain & Co consultants set out to apply his mentor’s philosophy to private equity, making companies more valuable by increasing efficiency and ﬁnding new markets. Until his departure, Romney reportedly held all of Bain Capital’s stock and made a fortune by participating in the ﬁrm’s deals.
“It was eye-opening, the techniques they were using to grow businesses and make business get better,” says Pagliuca, whom Romney hired as a summer associate at Bain & Co in 1981. “The rationale was, this consulting work that worked so well with companies could be used for investments, too.” Romney built a team of dealmakers who mostly resembled him— young, many of them Harvard Business School graduates—who focussed on rigorous analysis instead of investment banking tricks like loading a target with debt so it could spit out a quick dividend.