Boston Capital

Mitt Romney, private equity in the public eye

Here’s an early can’t-miss New Year’s prediction: A noisy debate about the social value of private equity will become a staple of campaign politics in 2012.

Republican presidential hopeful Mitt Romney’s background as a founder of Boston’s Bain Capital - his critical management credential - and the nature of campaigns guarantee that. In fact, Romney has already spent a lot of time and energy pushing back against Bain-related attacks from Democrats and even Republican challenger Newt Gingrich.

One small case in point: The image some Democrats like to call the “Gordon Gekko’’ picture - a 1980s-era gag photo of Romney and other smiling Bain Capital executives posing with literally lots of money in their hands and with even more cash sticking out of their pockets and collars. That picture says a lot more than a thousand words.


Romney acknowledged the photo could become political ammunition during a television news interview over the past weekend. The image, originally published by the Globe four years ago, has appeared elsewhere since. Yesterday, it was used in The New York Times to illustrate a story about Romney and Bain.

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A campaign debate will generate extreme and opposing descriptions of private equity investors and their long-term social and business impact. They either are bold risk-takers serving capitalism, or rapacious predators destroying companies and jobs.

Those polarized views are commonly discussed about Romney and Bain, but they also apply more broadly to the world of private equity investing. They are intentionally excessive and obviously both can’t be right.

In fact, most private equity managers take real financial gambles purchasing companies. But the risks are often jacked much higher in order to squeeze every dime of potential profit and limit financial exposure to investors. That means borrowing more money.

With such debts piling up, some companies require ideal conditions to succeed as an investment and a business. That’s the real problem.


Take one local example with no connection to Bain Capital: Friendly Ice Cream Corp.

The company filed for Chapter 11 bankruptcy protection two months ago, and an auction for bidders who might want to buy the company is scheduled Thursday. The one known bidder is Sun Capital Partners, the private equity firm that owns the restaurant chain.

A lot of bad things have happened to Friendly and its employees since the bankruptcy filing. A total of 63 stores closed immediately and more than 1,000 employees were laid off. The company’s pension plan, badly underfunded, was frozen.

The Friendly story is complicated because the company had been in trouble before Sun bought it in 2007. Founded during the Great Depression, Friendly wasn’t competing in the modern world. Sun Capital didn’t invent the problems at Friendly - it bought them.

But the private equity owners effectively increased their bet by selling Friendly’s real estate and leasing it back. That generated cash, which Sun Capital used to reduce the borrowing that had financed the Friendly purchase. It shifted some risk from investors to the restaurant company.


More recently, Friendly faced basic business problems. Restaurant sales were going down and prices for the dairy products it bought were rising sharply.

Private equity firms are in business to serve their clients, not the companies they buy or the people who work them

But the big debts were part of the story too. Friendly was one of those companies that needed ideal conditions to succeed as a heavily indebted business. It didn’t happen.

Private equity investors, especially those who specialize in buying companies in distress, do help some businesses survive. Perhaps a smaller Friendly operation will be one of those survivors.

But private equity firms are in business to serve their clients, not the companies they buy or the people who work them. Borrowed money can be the fuel for big profits, or the corrosive debt that eats away at a business. And in a slow economy, too many indebted companies need everything to go right from them to succeed.

Mitt Romney has been out of the private equity business for years now. His track record at Bain Capital was very good, measured by returns earned for clients. He helped some companies grow but there were others that did not succeed.

And now he’ll have to spend the rest of the campaign explaining that record and defending the social value of private equity investors everywhere.

Steven Syre is a Globe columnist. He can be reached at