

Michael Keating, a former partner at the Boston Consulting Group, discusses recent coverage of Mitt Romney's tenure as head of the private equity firm Bain Capital, including the Jan. 23 article, "Romney tax returns likely to stoke debate over economic fairness." If you would like to write a full-length response to a recent Times article, editorial or Op-Ed, here are our FAQs and submission policy.

Part of the novelty of the current Republican primary race and the focus on the candidates' income tax returns is the emergence of the private equity business as a bone of contention, particularly between Newt Gingrich and Mitt Romney. For most Americans, private equity remains somewhat mysterious; we only hear about firms like Bain Capital, the Blackstone Group or Kohlberg Kravis Roberts when a certain company suddenly disappears from the stock market or from the grasp of its founders and is transformed as if swallowed by a whale or, as Newt Gingrich would have it, a giant shark.

In some cases, the transformation is positive. What is always the case, however, is that the strategy of the newly transformed company is simply to make money, lots of it, and not for the employees or even for managers but for the new owners -- the Bain Capitals or the Blackstones or whomever. In some cases the company will be "lipsticked" for an eventual stock sale on Wall Street. In other cases the company will remain in the stable of the private equity firm churning out profits for the partners. Whether jobs are created or not is not the point. The point is cash -- as much as can be squeezed from the lemon, because the folks at Bain Capital and Blackstone are nothing if not expert lemon squeezers.

In this Gingrich has a point. Private equity consultants are not real business people, if real business people can be defined as entrepreneurs who want to build something of lasting value that can employ members of their community and make profits for their shareholders, whether public or private. A private equity consultant is more like an Excel spreadsheet with legs that looks at the "target" company through the lens of return-on-investment and cutting costs to the bone. If those costs are people, well, that's just capitalism in action. If an opportunity exists to expand a product line and it becomes necessary to hire some engineers and sales people, then welcome aboard. It's all a very finely tuned calculation that has nothing to do with what most people recognize as doing business. It is an abstract exercise, at best, that most of these ladies and gentleman have learned at places like the Harvard Business School, the University of Pennsylvania's Wharton School or wherever business is taught as warfare rather than as a contributor to the social good.

This is not to say that private equity, or its kissing cousin management consulting, are not contributing to the general good. Like wolves or sharks, their role in the ecosystem is to identify and cull out the weak and profit from their superior evolutionary skills, which in their case is knowledge of discounted cash flows and internal rates of return. In our current system of capitalism, which has much good and just as much bad, the private equity guys are the smartest guys in the room. They can smell a nonperforming asset a mile away as well as they can identify underperforming companies or management teams that lack a compelling vision.

This is how Romney is already beginning to portray President Obama. Romney sees America as an underperforming asset. He wants to cut the fat out of the government and set a strategic course that will enhance its value and reinvigorate its shareholders, who are presumably the American people. But there's the rub. In private equity, value creation is an inside job; it isn't meant for public consumption. If Romney views America through the lens of Bain Capital, then the profits he hopes to garner from the reengineering of America are bound for a very small group of shareholders. The Occupy Wall Street crowd has been trying to wake us up to exactly who that group is. It is not you and me.

I hate to agree with Gingrich, who himself has taken millions from private equity guys, but he is correct about Romney. The former Massachusetts governor is not a businessman in the way that most business people conduct business. Most business people should be afraid of guys like Romney. Bain Capital wants to see if you are bleeding, but instead of helping you it will put a bag over your head, stuff you into the trunk and will let you out only if you promise to do everything they say and never get sentimental about things like your community or your employees.

If Romney were to run the country in the spirit of his private equity experience, there is only one thing to say to America: Be afraid, be very afraid.

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-- Michael Keating

Photo: Mitt Romney, seen in 1990, was tapped by Bain & Co. founder William W. Bain Jr., right, to launch private equity group Bain Capital. Credit: Justine Schiavo / The Boston Globe