You’re so Bain – Mitt’s OJ problem and missing link in PE furor

The blogosphere has been raging with debate today about the role of Mitt Romney at Bain. My first reaction was, well, if this is true, if Mitt Romney told one government agency he had only a passive role at Bain as of 1999 and told the SEC that he was Bain’s CEO then that is a problem.

But could it be true?

Unfortunately the reporting by the MSM on this issue has been horribly confused. I noted in several tweets that the problem might be that Romney was CEO of the general partner of a limited partner. If that were the case then the two disclosures made by Romney might be reconciled. The GP of an LP of a PE fund – yes, I know, a mouthful – may indeed be a passive player in the complex world of PE funds.

Not trusting the MSM and not getting any clarity from the Obama twitterers either, I decided to dig into the SEC documents myself. I have written in depth about PE funds here and here so thought it worth assessing. Well, it did not take long to figure out that Romney may have a real problem on his hands and that this may explain his rather confused response to the situation today.

Let me give just one example, although there may be more. In 2000, after Romney has stated he left active control of Bain, Bain entered into a transaction that left it and associated entities holding nearly 33% of the shares of Odwalla, the juice company.  Bain had sold to Odwalla another company called Fresh Samantha. When Odwalla later sold itself to Coca Cola, Bain made a handsome return on those shares.

WaPo’s Factchecker looked at this transaction and clearly did not understand it. They concluded that it did not show that Mitt Romney had a managerial role. That is manifestly not true. In a 13D filing that Bain made describing their role, Bain makes it clear that Romney was not just the holder of a passive LP interest. He was also sole shareholder, sole director, CEO, President, Managing Director and “thus is the controlling person” of Bain Capital, Inc.

This is the missing link in today’s story.

The key question in a PE firm is where the power lies.  It lies in the management company at the heart of the web of entities set up by a PE fund. The management company is the wheelhouse of a PE firm where the key decisions are made that then radiate throughout the entire system.  Whether it is KKR or Blackstone or Carlyle or TPG or Bain, there is always such an entity. And at Bain – during Romney’s tenure – that entity was Bain Capital, Inc., a separate entity that Bain itself explained in its Odwalla filing had as its “principal business” “that of a management company and managing partner of the BCIP Entities.” (In this transaction the BCIP Entities were the underlying “passive” investment funds like Bain Capital VI which had handed over to Bain Capital, Inc., the power to manage their investment.)

In other words it is at Bain Capital, Inc. where major decisions about Bain as a whole were made. While Romney would have worked with fellow professionals to develop an overall strategy with respect to an investment like that in Fresh Samantha or Odwalla, at the end of the day he, and he alone, had sole legal responsibility for decisions made by Bain Capital, Inc. Of course, specific responsibilities and decisions could be delegated or structured differently with respect to different transactions, so a final conclusion about power and decision making can only be made if the agreements between the entities are made public.

But it is reasonable to conclude from the description provided by Bain itself to the SEC that Bain Capital, Inc. was acting as the leader of the underlying passive investors and thus Romney would have had a key and substantive role in such decisions as whether to sell Fresh Samantha to Odwalla and how to use the 33% stake Bain had received in Odwalla to wield power inside that company. This would have included important active decisions on votes for the Odwalla board of directors (in fact, two Bain employees sat on the Odwalla board at this time) and eventually on the sale of Odwalla to Coke. Even if Romney spent most of his time running the Olympics, at the end of the day his signature was needed on key decisions like these as he was the “controlling person” of Bain Capital, Inc.

A similar kind of relationship could be found a year later, in 2001, now some two years after Romney said he had left active control of Bain behind, at Domino’s, the pizza chain company.  Bain had a 49% stake in that company and its fiscal year 2000 annual report on form 10-K filed on March 28, 2001 lists Romney as – still – wholly owning Bain Capital, Inc.

One year later, however, Romney’s name disappears from the Domino’s SEC filing. And so does Bain Capital, Inc. The latter is replaced by Bain Capital Investors, LLC, which appears to have, at that point, taken over for Bain Capital, Inc., and likely for Romney himself as the central managerial entity in the Bain network. Only when that step had been completed can it be said that indeed Romney no longer had an “active” role at Bain.

Whether this adds up to a felony, of course, as the Obama campaign argued today is a separate question. But there can be little doubt that as a legal matter, Mitt Romney remained in charge at Bain through his control and legal responsibility for Bain Capital, Inc., the management company at the heart of the Bain empire.  While Romney also held controlling positions in limited partnerships that, indeed, have “limited” roles in the day to day life of Bain overall, that is not the case with respect to Bain Capital, Inc., the hub of the entire enterprise.

As my article in Dissent and book chapter suggest, there is a larger problem at stake here than the political campaign. I argue there that we live in an era of private equity capitalism. Even firms not owned or connected to PE funds are nonetheless impacted by their pressure on them for greater profits and efficiency. Hopefully some clarity can come to the PE debate and a healthy discussion about alternatives to PE capitalism can emerge.

1 Comment

  1. Stephen Diamond

    Actually, in his interview with Jan Crawford Greenberg on CBS, which I now link to in the post, Romney accurately stated that he owned the management company that ran Bain. However, he tried to contend that he played no active role in that entity. That is, indeed, very hard to accept because as CEO he would have had to make certain key decisions even if he really wanted to be off playing golf all day (or running the Olympics) and let someone else handle the details. Romney also tried to steer the discussion towards his role as the general partner of the limited partnerships where outside investors placed their capital. But by definition the “GP” of an LP typically has certain powers over that LP entity. These can be delegated to others, but the GP would remain the principal in charge of that agent and retain the authority to control that agent in key ways.

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