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How ‘vulture capitalists’ make their money

Thanks to reader Henry, I learned about this article by James Surowiecki in the New Yorker that explains how private equity firms like Bain Capital (where Romney made his fortune) make their money. It is not pretty.

Private equity firms use a small amount of their own money and the rest from private investors and loans to purchase troubled companies. It used to be the case that whether the private equity firm made money depended on whether the troubled companies they purchased could be made successful. But within the last decade or so, the use of tax loopholes resulted in that becoming less material, at least as far as companies like Bain were concerned. By borrowing huge amounts of money and paying themselves exorbitant ‘management fees’ and ‘special dividends’, private equity companies like Bain made a bundle even as the companies they took over struggled and sometimes sank under the mountainous debt.

We have to thank Romney’s candidacy for bringing the workings of private equity companies into the spotlight. As Surowiecki says:

At this point, the people who run America’s private-equity funds must be ruing the day Mitt Romney decided to run for President. His fellow Republican candidates, of all people, have painted a vivid picture of private-equity firms—including Bain Capital, where he worked for fifteen years—as job-destroying vultures, who scavenge the meat from American companies and leave their carcasses by the side of the road. Not since the days of “Wall Street” and “Barbarians at the Gate” have the masters of leveraged buyouts looked quite so bad.

Rick Perry’s characterization of Romney as a ‘vulture capitalist’ may be the one contribution his ill-fated candidacy made to politics.

So thanks Mitt and Rick, for enabling the excellent phrase ‘vulture capitalist’ to enter into the political discourse.

Comments

  1. Scotlyn says

    And your last story nicely illustrated the fact that vulture capitalists have now got their claws into whole national economies, not just companies.

    The EU/ECB/IMF “troika” will now proceed to asset-strip and bankrupt Ireland, leaving us with no functioning economy and no functioning government, the people’s labour committed for centuries ahead to the repayment of unpayable debts and to the payment of taxes to go for more unpayable debts.

  2. Pierce R. Butler says

    The phrase “vulture capitalist” has multiple meanings, probably most often applied to the “venture” capitalists who fund start-up companies in usurious and exploitative ways.

    “Vulture” capitalist is even more appropriate for those wheeler-dealers who buy up debt obligations from poor and relatively powerless nations (often paying less than 10% of the loan’s face value), and then use legal and political leverage to force those nation’s governments to pay up – inevitably at the expense of the most needy and helpless within their borders.

    In those terms, possibly W.M. Romney doesn’t deserve this particular epithet. But, hey, what the hell…

  3. Radi says

    LOOOVE the new term… “Vulture Capitalists” indeed! That term ought to be spread far and wide, emphasized early and often.

  4. jpmeyer says

    “Private equity firms use a small amount of their own money and the rest from private investors and loans to purchase troubled companies.”

    Often times, they are anything but troubled. The Bain acquisition of Ampad came about primarily because Ampad was a fairly “boring” business. It didn’t have much growth or problems, which made it quite creditworthy. This made it a juicy target for Bain because it meant that they would be able to take out tons of credit under Ampad (and which Ampad would never be able to pay off, hence its convenient bankruptcy right after Bain divested themselves of it.)

    More info here: http://www.massresistance.org/romney/ampad_062607/index.html

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