I Knew Some Vulture Capitalists, and, Governor Romney, You’re No Vulture Capitalist

The rap on Governor Romney is that he was the original CEO of Bain Capital, which, during Romney’s many years there, acted as a venture capitalist.  To Romney’s critics, being a venture capitalist is the same as being a “Vulture Capitalist,” which is bad.  So, what exactly do these terms mean?  Here is a summary of the relevant terminology:

(a)  Investment firms make a living by investing in other businesses.  Some investment firms – like Goldman Sachs,  JP Morgan, & Merrill Lynch –  invest in a broad range of other businesses, including public corporations – that is, they buy stock or other securities issued by companies whose stock is listed on a public securities exchange like the NYSE or NASDAQ.  Other investment firms, such as Bain Capital, may invest primarily in privately-held companies – they buy ownership interests in businesses that are not publicly listed and traded.  Investments in privately held companies are called “private equity.”

(b) Private equity investments typically consist of the acquisition of at least a majority of the equity securities (often, common stock) of the target company, rather than just a purchase of a block of stock.  When the principal purpose of the acquisition- transaction is to provide the target company with the financial wherewithal to substantially expand or alter its business, the transaction is said to involve “venture capital.”

(c) Venture capital transactions are called “leveraged buyouts” when they involve leveraging (borrowing against) the assets of the target company in order to finance the intended expansion or alteration of its business.

(d) Leveraged buyouts are sometimes criticized when the proceeds of the leveraging of the target company’s assets are used for other purposes, such as paying for the buyout of the principals of the company, paying for those principals to perform ongoing services of questionable value, or paying the investment company for services of questionable value.  The questions can become particularly harsh when the amounts used for such other purposes are large and the effect of the leveraging is to leave the target company itself with a substantially-increased debt-burden – in such cases, if it appears that the deal is not likely to resuscitate the target company, that is what is meant by  the term, “Vulture Capital.”

In other words, Vulture Capital is a subset of Leveraged Buyouts, which are a subset of Venture Capital, which is a subset of Private Equity, which is a subset of what Investment Firms do, and Leveraged Buyouts are themselves generally OK, except when they cross a certain line and become more likely to make money for the participants than to rescue and grow the target company.

The negative image of the private-equity business appears to be based primarily upon the antics of people such as Michael Milken (during the roaring-80s) and, more recently, Sam Zell, famous for his leveraged buyout of The Tribune Company, which left that company burdened with enormous debt that led quickly to bankruptcy.  For each of those investors, the line between fame and infamy appears to have been the point at which too much leveraging left the participants rich but the target company broke.   In the case of Mitt Romney, there does not appear to be even a shred of evidence that any of Bain Capital’s deals ever crossed over that line or even came anywhere near it.   Unless it did, there should be no reason to view Bain Capital, or any other investment company that provides venture capital for private-equity investments in leveraged buyouts, as anything other than the very kind of socially-useful business that was essential to the building of this country – try to imagine Silicon Valley without venture capital!

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