By Andrew Beatty (AFP) – Jan 10, 2012
WASHINGTON — Scrutiny of Mitt Romney's tenure at Bain Capital has revived contrasting caricatures of venture capitalists as profiteering vultures and bold job creators, but both depictions tell only part of the story, experts say.
Job creation was meant to be a golden arrow in Romney's quiver, one that if shot straight and true would deflate President Barack Obama's chances of re-election in November.
But even in these early stages of the 2012 campaign, Romney's effort to style himself as a bona fide jobsmith -- through his 15 years running private equity firm Bain Capital -- is in danger of backfiring.
On the cusp of the New Hampshire primary, Romney finds his claim that Bain created 100,000 jobs by investing in struggling firms coming under searing scrutiny.
Even Romney's Republican brethren accuse him of representing a ugly kind of capitalism, one willing to loot companies, sack workers and pocket the profits.
The debate may be familiar to many who lived through the heyday of venture capital in the 1970s, 80s and 90s.
Then, high-stakes investors like Bain were lionized for playing midwife to the likes of Staples, Intel and Microsoft, but they were castigated at the same time for putting short-term profits before people and long-term viability.
Twenty years on, both views still have a fleck of truth, but tell only part of the story, according to Steven Davis, professor of international business and economics at the University of Chicago Booth School of Business.
Late in 2011, Davis and four colleagues published a wide-ranging study, gleaned from 25 years worth of government and private data, about the impact of private equity buyouts on jobs.
Tracking 3,200 targeted firms and their roughly 150,000 shops, factories and assorted outlets from 1980 to 2005, Davis and his colleagues discovered a clear pattern.
"According to our study jobs are at greater risk after the first few years of a buyout," Davis told AFP.
The study showed that two years after a buyout, a single store or factory was likely to have three percent fewer jobs than would otherwise be the case. After five years the figure jumped to six percent.
"But that is not the whole picture," Davis said, adding that bought-out firms were also more likely to create new stores or factories that brought about new jobs.
The net impact was that bought-out firms were likely to have only slightly fewer staff than they would have had otherwise, with firms targeted by venture capitalists likely to have less than one percent fewer jobs.
"When you put all these pieces together it adds up to a modest reduction in jobs," said Davis.
So why the furor?
According to Davis, it is because a firm targeted by private equity is much more likely to be a roaring success or an abject failure.
In general, when private equity investments create jobs, they can be really successful, but when they fail they can seriously crash and burn.
According to a Wall Street Journal investigation, Bain seems to be no different.
Of 77 companies Bain invested in during Romney's tenure, 22 percent filed for bankruptcy and another eight percent performed so poorly that Bain lost its entire investment.
But 10 investments were major winners for Bain, providing the bulk of the firm's gains.
It is these spectacular failures and successes that are now being fought over in the race to the White House.
After buyouts, "there is both more job creation and more job loss, so there is a lot of scope for either side to cherry pick, to give an unbalanced interpretation of the evidence," said Davis.
For the Romney camp, that means talking about Bain's role in boosting job-creators like Staples, the Sports Authority and Domino's pizza.
For Romney's critics, it means talking about large-scale job losses at DDi Corp, Clear Channel Communications and a host of other firms, which suffered even as Bain made money.
With a trove of evidence for both success and failure, Romney's decision to tout his venture capitalist credentials may end up being a bit like venture capitalism itself -- offering high risk but potentially great rewards.
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