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<div class="timestamp">June 22, 2012</div>
<h1>Companies’ Ills Did Not Harm Romney’s Firm</h1>
<span><h6 class="byline">By <a rel="author" href="http://topics.nytimes.com/top/reference/timestopics/people/l/michael_luo/index.html" title="More Articles by Michael Luo" class="meta-per">MICHAEL LUO</a> and <a rel="author" href="http://topics.nytimes.com/top/reference/timestopics/people/c/julie_creswell/index.html" title="More Articles by Julie Creswell" class="meta-per">JULIE CRESWELL</a></h6>
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<div id="articleBody">
<p>
Cambridge Industries, an automotive plastics supplier whose losses had
been building for three consecutive years, finally filed for bankruptcy
in May 2000 under a mountain of debt that had ballooned to more than
$300 million. </p>
<p>
Yet <a title="Bain Capital web site." href="http://www.baincapital.com">Bain Capital</a>, the <a href="http://topics.nytimes.com/top/reference/timestopics/subjects/p/private_equity/index.html?inline=nyt-classifier" title="More articles about private equity." class="meta-classifier">private equity</a>
firm that controlled the Michigan-based company, continued to
religiously collect its $950,000-a-year “advisory fee” in quarterly
installments, even to the very end, according to court documents.
</p>
<p>
In all, Bain garnered more than $10 million in fees from Cambridge over
five years, including a $2.25 million payment just for buying the
company, according to bankruptcy records and filings with the Securities
and Exchange Commission. Meanwhile, Bain’s investors saw their $16
million investment in Cambridge wiped out. </p>
<p>
That Bain was able to reap revenue from Cambridge, even as it foundered, was hardly unusual. </p>
<p>
The private equity firm, co-founded and run by <a href="http://elections.nytimes.com/2012/primaries/candidates/mitt-romney?inline=nyt-per" title="More articles about Mitt Romney." class="meta-per">Mitt Romney</a>,
held a majority stake in more than 40 United States-based companies
from its inception in 1984 to early 1999, when Mr. Romney left Bain to
lead the Salt Lake City Olympics. Of those companies, at least seven
eventually filed for bankruptcy while Bain remained involved, or shortly
afterward, according to a review by The New York Times. In some
instances, hundreds of employees lost their jobs. In most of those
cases, however, records and interviews suggest that Bain and its
executives still found a way to make money. </p>
<p>
Mr. Romney’s experience at Bain is at the heart of his case for the
presidency. He has repeatedly promoted his years working in the “real
economy,” arguing that his success turning around troubled companies and
helping to start new ones, producing jobs in the process, has prepared
him to revive the country’s economy. He has fended off attacks about job
losses at companies Bain owned, saying, “Sometimes investments don’t
work and you’re not successful.” But an examination of what happened
when companies Bain controlled wound up in bankruptcy highlights just
how different Bain and other private equity firms are from typical
denizens of the real economy, from mom-and-pop stores to bootstrapping
entrepreneurial ventures. </p>
<p>
Bain structured deals so that it was difficult for the firm and its
executives to ever really lose, even if practically everyone else
involved with the company that Bain owned did, including its employees,
creditors and even, at times, investors in Bain’s funds. </p>
<p>
Bain officials vigorously disputed any notion that the firm had profited
when its investors lost, arguing that a full accounting of their costs
across their business would show otherwise. They also pointed out that
Bain employees put their own money at risk in all of the firm’s deals.
</p>
<p>
“Bain Capital does not make money on investments when our investors lose money,” the <a title="Bain statement (pdf)" href="http://www.nytimes.com/2012/06/23/us/politics/response-from-bain-capital.html">company said in a statement.</a>
“Any suggestion to the contrary is based on a misleading analysis that
examines the income of a business without taking account of expenses.”
</p>
<p>
To a large extent, however, this is simply the way private equity works,
offering its practitioners myriad ways to extract income and limit
their risk. Mr. Romney’s candidacy has helped cast a spotlight on an
often-opaque industry. </p>
<p>
In four of the seven Bain-owned companies that went bankrupt, Bain
investors also profited, amassing more than $400 million in gains before
the companies ran aground, The Times found. All four, however, later
became mired in debt incurred, at least in part, to repay Bain investors
or to carry out a Bain-led acquisition strategy. </p>
<p>
Perhaps most revealing are the few occasions, like with Cambridge
Industries, when Bain’s investors lost. Lucrative fees helped insulate
Bain and its executives, records and interviews showed. </p>
<p>
<strong>Piling On Debt</strong> </p>
<p>
Having spun off from a management consulting firm, Bain has always been
known for its data-driven, analytical approach. Under Mr. Romney, the
firm scored some remarkable successes, enabling its investors — wealthy
individuals and institutions like pension funds — to collect stellar
returns. </p>
<p>
The companies that fell into bankruptcy were clearly the exception, and
the causes were also often multilayered. Some companies proved too
troubled to rescue, and others were hit by broader economic or
industrywide downturns. </p>
<p>
In at least three of the seven bankruptcies, however, companies appear
to have been made more vulnerable by debt taken on to return money to
Bain and its investors in the form of dividends or share redemptions.
</p>
<p>
That was arguably the case with GS Industries, a troubled Midwest steel
manufacturer that Bain acquired in 1993, investing $8.3 million. The
private equity firm took steps to modernize the steelmaker. A year
later, the company issued $125 million in debt, some of which was used
to pay a $33.9 million dividend to Bain, securities filings show.
</p>
<p>
The private equity firm plowed an additional $16.2 million into the
steelmaker, but when the industry experienced a downturn in the late
1990s, the company could not manage its heavy debt. It filed for
bankruptcy in 2001, but Bain’s investors still earned at least $9
million. </p>
<p>
Debt from acquisitions, usually part of a “roll-up” strategy of buying
competitors, played a role in at least five of the seven bankruptcies
The Times examined. In most of these cases, Bain investors garnered some
initial gains before the companies faltered. </p>
<p>
For example, after Bain acquired Ampad, a paper products company, in
1992, the company grew through a series of acquisitions. Sales jumped,
but its debt climbed to nearly $400 million, and it found itself
squeezed by “big box” office retailers. It filed for bankruptcy in 2000.
Bain and its investors walked away with a profit of more than $100
million on their $5 million investment, on top of at least $17 million
in fees for Bain itself, according to securities filings and investor
prospectuses. </p>
<p>
A similar phenomenon unfolded with DDi, a Bain-owned circuit board maker
that expanded aggressively in the late 1990s. Sales soared, but so did
its debt. The bursting of the tech bubble forced it to scale back. It
filed for bankruptcy in 2003. The gains for Bain’s investors easily
exceeded $100 million. Bain also collected more than $10 million in
fees. </p>
<p>
<strong>Substantial Fees</strong> </p>
<p>
The numerous fees collected by private equity firms have been a frequent
lightning rod for the industry. First, the firms charge their investors
a percentage of the fund as a management fee, meant to cover its
overhead. During Mr. Romney’s tenure, this was initially 2.5 percent and
then dropped to 2 percent. Private equity firms also collect
transaction or deal fees, ostensibly for advisory work, from companies
they buy. These fees are generally collected for major transactions,
like the purchase of another company, a public stock offering or even
the initial acquisition of the company. A third fee stream comes from
annual monitoring or advisory fees that portfolio companies typically
pay to their owners, the buyout firms. </p>
<p>
These fees can be substantial. In the case of Dade International, a
medical supply company in which Bain acquired a stake in 1994, Bain and
other investment firms piled up nearly $90 million in fees over seven
years. The company filed for bankruptcy in 2003 but not before it had
borrowed heavily to pay $420 million to Bain and other investors several
years earlier. </p>
<p>
In 1998 alone, Mr. Romney’s final full year at Bain, The Times was able
to identify roughly $90 million in fees collected by the firm across its
various funds, a figure that is probably low because most companies in
Bain’s portfolio did not have to file financial disclosures. </p>
<p>
These fees covered Bain’s expenses — like rent, salaries and lawyers —
and the bulk of the remaining money was awarded to Bain employees as
annual bonuses. </p>
<p>
Bonuses were relatively small some years, like from 1989 to 1991, when the <a href="http://topics.nytimes.com/top/reference/timestopics/subjects/s/savings_and_loan_associations/index.html?inline=nyt-classifier" title="More articles about savings and loan associations." class="meta-classifier">savings and loan</a>
crisis and other events slowed business. In that period, Bain managing
directors made roughly $300,000 to $400,000 a year, mainly from their
salaries, excluding gains from investments, according to an executive
familiar with Bain’s compensation. By the mid-1990s, as Bain grew,
managing directors’ annual incomes, again excluding investment returns,
had swollen to $3 million to $5 million, mainly thanks to bonuses
derived from fees. </p>
<p>
Bonuses were not the main drivers of the immense wealth accumulated by
Mr. Romney and other Bain executives. That came from their share of
Bain’s “carried interest,” the firm’s cut of its funds’ investment
profits, as well as the returns from personal investments in Bain deals.
</p>
<p>
Bain officials insist that fees were never a way for the company to
garner much in the way of profits and pointed out fee structures for
every fund are agreed-upon in advance by investors. They said fees
supported the firm’s staff-intensive approach to managing companies.
Totaling up the hours Bain employees put into deals at standard
consulting rates, they said, would far exceed what the firm actually
collected. They said fees also covered the costs of hundreds of deals
researched every year and not pursued or completed. </p>
<p>
Investors have succeeded in the past decade in pressing private equity
firms for a greater share of these fees. In 2009, a trade group
representing institutional investors issued <a title="Institutional Limited Partners Association private equity principles" href="http://ilpa.org/ilpa-private-equity-principles/">guidelines</a>
it believed firms should follow, including turning over all advisory
and deal fees to investors, also known as limited partners. “The battle
over fees is right now going in the limited partners’ direction,” said
Steven N. Kaplan, a University of Chicago finance professor. </p>
<p>
Bain began splitting some fees with its investors in 2000. In the firm’s
newest fund, Bain officials said they would funnel all deal fees to
their limited partners. </p>
<p>
Bain prides itself on the personal money its employees put into deals,
saying its co-investment rate is among the highest in the industry. The
percentage during Mr. Romney’s tenure sometimes ran to nearly 30 percent
but was usually less, according to records and interviews. </p>
<p>
“We are collectively the single largest investor in every portfolio
company and every fund,” the company’s statement said. “When our
portfolio companies grow and perform, investors and Bain Capital do
well. In rare instances when a business fails, Bain Capital employees
share in the negative economic consequences of those losses.” </p>
<p>
<strong>Offsetting Losses</strong> </p>
<p>
When deals sour, however, fees can provide a hedge. </p>
<p>
Toward the end of Mr. Romney’s tenure, Bain bought Anthony Crane, a
crane rental company, which then acquired a slew of smaller competitors,
financed by debt. But a building slowdown hit the company hard, and it
filed for bankruptcy in 2004, wiping out $25.6 million from Bain’s
investors, along with $9.5 million from Bain employees. The firm,
however, collected $12 million in fees over the life of the deal.
</p>
<p>
Bain officials maintained they still lost money on Crane because it also
cost them $5.1 million in carried interest that they otherwise would
have garnered from gains in the rest of the fund. </p>
<p>
When Bain bought a troubled chain of maternity stores called Mothercare
in 1991, its investors put $1.24 million into the deal. Bain
repositioned the company and upgraded its merchandise, but the stores
still struggled. Bain offloaded the chain in 1993 at a total loss, and
the new owners put it into bankruptcy. Bain still collected $1.5 million
in fees while it owned the company, bankruptcy records show. </p>
<p>
In the case of Cambridge Industries, Bain first acquired a stake in the
manufacturer of plastic automotive parts in 1995. Bain employees
personally invested $2.2 million, according to bankruptcy records,
alongside $15.7 million from outside investors. </p>
<p>
Bain immediately collected $2.25 million from Cambridge as a transaction
fee for investing in the company. Cambridge then acquired several
companies in rapid succession, and each time, Bain earned 0.75 percent
of the purchase price as a transaction fee. The rest of Bain’s $10
million in fees came through advisory fees and payments for a debt
refinancing completed by Cambridge in 1997. </p>
<p>
By then, interest payments from the company’s expansion were
outstripping operating income. As part of the refinancing, aimed at
lowering interest payments, Cambridge repaid $17 million it owed to a
debt fund run by Bain. This involved paying it a $2 million prepayment
penalty. </p>
<p>
Cambridge was finally forced into bankruptcy in 2000, when Bain declined
to provide the company with an infusion of capital needed to fulfill a
major new order, according to former company officials. During
bankruptcy proceedings, lawyers for some of Cambridge’s creditors
leveled scathing criticism at Bain, zeroing in on the fees extracted
while they said Cambridge was insolvent, as well as the prepayment to
Bain’s debt fund. </p>
<p>
Eventually, Bain settled the dispute by paying $1.5 million to the bankruptcy trustee. </p>
<p>
“We have been unable to identify what, if any, ‘reasonably equivalent
value’ the Company received in exchanges for these exorbitant fees,”
Michael Stamer, a lawyer for the unsecured creditors committee, wrote to
Bain’s lawyers. “It appears, instead, these fees were nothing more than
a device used by Bain to provide a return on its equity.” </p>
<div class="authorIdentification">
<p>Mike McIntire contributed reporting.</p> </div>
<div class="articleCorrection">
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