The Bain Method

Andrew Sullivan —  Jan 23 2012 @ 2:58pm

James Surowiecki's critique of private-equity firms deserves a read. The bottom line:

[H]istorically private-equity firms have in principle had a powerful incentive to make companies perform better. In the past decade, though, that calculus changed. Having already piled companies high with debt in order to buy them, many private-equity funds had their companies borrow even more, and then used that money to pay themselves huge “special dividends.” This allowed them to recoup their initial investment while keeping the same ownership stake. Before 2000, big special dividends were not that common. But between 2003 and 2007 private-equity funds took more than seventy billion dollars out of their companies. These dividends created no economic value—they just redistributed money from the company to the private-equity investors.

Joe Klein tosses in his two cents. If you want to see how this kind of thing was central to how Bain operated and operates, see this.

This matters. The question to me is how Bain's methods – with some greatly varying results – nonetheless gave Bain investors increasingly massive rewards, buttressed by tax breaks in a lobbyist-run tax code. That combination is politically toxic. And should be.