Posts filed under “Venture Capital”

No Alpha: Bain Capital’s Investment Results

The political season is in full throat. While everyone is focusing on Mitt Romney’s VEEP selection of Paul Ryan, perhaps it is time to refocus our views elsewhere.

During the primaries, there were all manner of attacks on Bain Capital as a proxy for Mitt Romney. The criticism for outsourcing and layoffs, for the fortune he earned (estimated at $190 – $250 million). Bain saddled some companies with huge debt, using the proceeds to extract large fees. It was a very sharp elbowed form of capitalism. Surprisingly, the criticism came not from the left, but from Romney’s primary challengers on his right. Strange.

This morning, we are going to review how Bain Capital actually performed as investors. No, they did not (as claimed) return 113% per year. In fact, their investment performance, according to their own data, was rather unremarkable.

Ignore the anecdotal attacks from both opponents and supporters. Thanks to two intrepid Wall Street Journal reporters, the full Romney/Bain record has been reviewed. During the GOP primaries, Mark Maremont of the Journal completed a comprehensive assessment of Bain Capital, including all “77 businesses Bain invested in while Mr. Romney led the firm from its 1984 start until early 1999.” And on August 5, Brett Arends released the ebook The Romney Files, which includes extensive reviews of Bain Capital.

Let’s start with the WSJ article. Among its key findings:

• $1.1 billion invested generated $2.4 billion in gains for its investors over 16 years;
• 22% of the companies either filed for bankruptcy reorganization or closed their doors;
• An additional 8% ran into so much trouble that Bain lost 100% of client money invested in each deal;
• Bain’s returns came from just a small number of investments. Ten deals produced more than 70% of the total dollar gains. (4 of the 10 of these businesses later ended up in bankruptcy court).
• Several of Bain’s biggest successes became household names: Staples, Domino’s Pizza Inc. and Sports Authority.

The Journal analysis shows that in total, Bain produced about $2.4 billion in gains for its investors in the 77 deals, on about $1.1 billion invested. This is before fees, which typically run in the range of 2% annually plus 20% of profits (widely known as “2+20”); Some newer Bain funds run 1 & 30, while some older funds ran 1.5 + 20.
That sounds like a great deal – but it is a far less attractive when you do the math and compare to other alternatives.

The Journal sourced its analysis from a list of 77 Bain investments covering 1984 through 1998 that were included in a document Deutsche Bank AG used to raise capital for a new Bain fund in 2000. The Deutsche Bank doc cites Bain as a source; these deals accounted for about 90% of the money Bain invested during that period. (The Journal days it obtained “updated information from a similar 2004 prospectus.”)



That January 2012 analysis looked at the specific deals Bain did. How did they actually perform as a fund over that same time period?

For that, we need to go to Brett Arends’ new ebook: The Romney Files: From Bain to Boston to White House Bid.  (excerpt here).

Let’s start with that silly 113% per year: Thats a more than doubling each year, and it would have turned $1.1 billion into $9 trillion over the same time period. So please ignore that absurd silliness. As Arends explains, it derives from the way Private Equity calculates internal rates of return. You can use it to compare private equity investments to each other, but not for anything else.

Arends calculates that

“Bain Capital, as we’ve seen, produced real dollar-on-dollar investment returns that were, at best guess, somewhere between 20% and 40% a year. If we figure the money was typically tied up for five to seven years, it was below 30%.

From 1984 through the end of 1998, the stock market overall produced gains of nearly 20% a year. If you had leveraged each dollar with $2 in debt at corporate interest rates, your returns would have ballooned to nearly 30% a year. If you’d been able to borrow $3 at corporate interest rates, you’d be up towards 35% a year. That’s how much money you could have made by issuing company bonds and then spending the money picking stocks out of the paper at random.

If they look pretty similar to the returns Bain Capital earned under Mitt Romney, maybe that’s not a complete coincidence.”

In other words, Bain produced all Beta, no Alpha. They used high leverage and took big risk for what was essentially market level rates of return. Any investor who listened to Vanguard’s John Bogle would have done about the same during 1984-1998 – just buy the S&P500 index, and hold it, reinvesting the dividends. The net returns would be ~20% per year — without giant fees or excessive risks necessary.


In my opinion, the whining (from the right!) about Bain’s outsourcing, layoffs, and the fortunes produced for insiders are misguided. That’s not why Bain should be criticized. Their fundamental flaw, at least according to the math, is that they took lots of risk, use immense leverage, and charged enormous fees, for performance that was more or less the same as indexing.

Said differently: Bain’s sins are the same sins most of Wall Street committed: Too high leverage, too much risk, excessive fees for too little performance.

Bain is worth criticizing not because they are so different, but rather, because they are pretty much just like the rest of Wall Street. And THAT’S nothing to brag about . . .




Romney at Bain: Big Gains, Some Busts
Mark Maremont
WSJ, January 9, 2012

The Romney Files: From Bain to Boston to White House Bid, Brett Arends (August 5, 2012)


Category: Investing, Politics, Venture Capital

Design for Startups

Hieu Nguyen: “I prepared this slide to teach at START CENTER (an incubator funded by World Bank)” Design for Startups from Hieu Nguyen

Category: Think Tank, Venture Capital, Web/Tech

Crowdsource THIS

    via XKCD

Category: Digital Media, Humor, Venture Capital

Is Private Equity Bad for Economy?

Visit for breaking news, world news, and news about the economy

Category: Venture Capital, Video

Where the StartUp Jobs Are

StartUpHire, with support from the National Venture Capital Association, is releasing a new infographic today depicting 2011 hiring data for startups. What’s the biggest take away? While most of the country is still sluggish on job creation, startups face the opposite problem- a glut of open technical jobs

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Category: Technology, Venture Capital

Step aside, old man. Let imagination lead the way.


My Sunday Washington Post Business Section column is (belatedly) up online. This afternoon, we look at the next generation of tech entrepreneurs Step aside, old man. Let moxie and imagination lead the way.

The online version was the conservative On Investing: The future isn’t grim, and it belongs to young entrepreneurs; the print print version had the more interesting Step aside, old man. Let moxie and imagination lead the way.

Here’s an excerpt from the column:

“On these pages, I have cast a rather skeptical eye on all matters financial. I have mocked the housing recovery calls, critiqued the valuation of Facebook, despised the robo-signing settlement, urged caution on the Black Friday retail hype. The silliness coming out of Wall Street is much like a carnival barker urging us to play one more of “games of skill.” All of which goes to say I am not your run-of-the-mill perma-bull or economic cheerleader. Readers, in fact, have called me a curmudgeon.

And yet, as I look to the long term, I’m optimistic.”


I really like what the Post did in the dead tree version of the paper — the art work is really interesting:
click for ginormous version of print edition


On Investing: The future isn’t grim, and it belongs to young entrepreneurs
Barry Ritholtz
Washington Post, April 22 2012

Washington Post April 22, 2012 Gx6(PDF)

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Category: Apprenticed Investor, Venture Capital

The Future of America

One of the things I have taught myself to do over the years was to think in different time frames. This includes very long geological epochs and astronomical eons. Maybe it was an interest in dinosaurs and astronomy as a kid, but historical time frames was a concept I was familiar with. Perhaps that was the…Read More

Category: Apprenticed Investor, Cycles, Psychology, Science, Venture Capital

Webstock ’12: Start Up Lessons for a 40 year old

Matt will cover a bunch of lessons he’s learned in the past decade of life as he embarks on turning 40. They eschew much of the Techcrunch/ReadWriteWeb/Mashable world by focusing on taking a longer term view of your work and focusing on life/work balance and having a happy life as well as a fulfilling career. (He is the creator of Metafilter and was an early employee of Blogger)

Webstock ’12: Matt Haughey – Lessons for a 40 year old from Webstock on Vimeo.

Category: Venture Capital, Video, Web/Tech

What VCs Are Looking For

What VCs Are Looking For View more presentations from Tarang Shah

Category: Technology, Think Tank, Venture Capital

What Do Private Equity Firms Actually Do?

Are private-equity firms job-destroying monsters? Or are they knights in shining armor, riding in to fix troubled companies and make the economy work better?

When you have a presidential candidate who used to run a private-equity firm, the arguments tend to shed more heat than light.

Category: Venture Capital, Video