How Bain Capital actually became the real-life model for other corporate raiders.
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|The fictional 1987 Hollywood blockbuster film Wall Street
(directed by Oliver Stone and starring Michael Douglas) was based on the real-life
characters of those such as Mitt Romney and other corporate raiders of the 1980's.
The movie really was "art imitating life".
Lately, because of Mitt Romney and Bain Capital, the private equity business has prompted a lot of questions, including the big one: "What good is this business, anyway?"
Detractors say private equity firms such as Bain Capital has enriched a handful of financiers at the expense of ordinary Americans. These
"deal makers" buy companies and then bleeds the life out of them. Jobs are often among the casualties.
Three decades after this sort of deal-making burst onto the scene in the merger mania of the 1980s, questions are finally being asked. We should have paid more attention to corporate raiders such as Gordon Gekko and Carl Icahn back those days.
What is certain is, these buyout specialists upended the old order and made vast fortunes for themselves. Fueled by easy money from banks, and from endowments and pension funds, these private investors were able to buy companies with borrowed money and risk relatively little of their own cash. ("Risk takers"?)
Today, many of these private equity kingdoms rival the nation’s mightiest public companies. In all, the private equity industry oversees $3 trillion in global assets, according to Preqin, the research firm. Buyout kings control more than 14,000 American companies, including brands like Hilton Hotels and Burger King. (During the 1980's, Herman Cain managed 400 Burger King stores.)
But financiers weren’t the only ones to embrace private equity. On the campaign trail, Rick Perry called private equity artists “vulture capitalists.” But yet, as governor of Texas, Rock Perry blessed the largest corporate buyout in history — the $44.4 billion takeover of the Texas utility company TXU by several investment firms in 2007. Indeed, as in many other places nationwide, public pension funds in Texas used public money to bet on private equity. (Nancy Perry is a Senior Vice President of TXU Energy.)
Against this backdrop, let's look at the story of another financier. It was, as the gossip pages would later report, the talk of the Hamptons — a midsummer night’s bacchanal in the playground of the 1 percent.
Beyond the windswept dunes in Bridgehampton, at a $400,000-a-month oceanfront mansion, bright young things bubbled up and the champagne flowed fast. Into the small hours, professional dancers in exotic clothing gyrated atop platforms. One couple twirled flaming torches. The sounds of techno boomed over the beach.
The New York Post summed up the evening’s Dionysian mysteries with the following headline: Nude Frolic in Tycoon’s Pool.
The "tycoon" and the party’s host, was a financier named Marc J. Leder, and those weekend revels last July had the East End of Long Island buzzing. Like many deal makers, though, Mr. Leder, 50, is virtually unknown outside financial circles. But from his headquarters in Boca Raton, Fla., he presides over a multi-billion-dollar private empire. He is a practitioner of a Wall Street art that helped define an age of hyper-wealth, and which has now been dragged into the white-hot spotlight of presidential politics: private equity.
It was through private equity that one Republican candidate, Mitt Romney, amassed his wealth — and, it turns out, it was through private equity that Mr. Romney first met Mr. Leder. A couple of months after the blowout party in Bridgehampton, Mr. Leder was host for a fund-raiser at his Boca Raton home for Mr. Romney’s campaign. But the connection goes back even further.
Years ago, a visit to Mr. Romney’s investment firm Bain
Capital inspired Mr. Leder to get into private equity in the first place. Mr. Romney was an early investor in some of
the deals done by Mr. Leder’s investment company, Sun
Capital, which today oversees about $8 billion in equity.
Mr. Romney’s own time in the private equity business at Bain Capital has provoked fierce attacks from Republican rivals and others. The story of Marc Leder might seem a footnote in the nation’s economic ledger. But it is a story worth knowing. That’s because, in many ways, Mr. Leder (just like Mitt Romney) personifies the debates now swirling around this lucrative corner of finance.
To Marc Leder's critics, he represents everything that’s wrong with this setup. In recent years, a large number of the companies that Sun Capital has acquired have run into serious trouble, eliminated jobs, or both. Since 2008, some 25 of its companies — roughly one of every five it owns — have filed for bankruptcy.
Yet Mr. Leder doesn’t seem to be suffering too much himself. In fact, he is living so large that he can’t avoid the limelight. Last July, he used part of his personal fortune to join a group of investors in buying the NBA team the Philadelphia 76ers. In December, Mr. Leder was spotted on St. Bart’s with Russell Simmons, of Def Jam and Phat Farm fame, and Rachel Zoe, the celebrity stylist. That again landed him in The New York Post, which dubbed him a “private equity party boy.”
Marc Leder's Sun Capital acquired Friendly’s Ice Cream in 2007 for $395 million — an 8 percent premium based on Friendly’s stock price at the time. But now Sun Capital is saying the weak economy pushed it to bankruptcy. The Pension Benefit Guaranty Corporation, the U.S. government agency that helps safeguard corporate pensions, wasn’t so sure. It accused Sun Capital in bankruptcy court filings of using the bankruptcy to shift Friendly’s pension burden onto the agency.
Marc Leder just shrugged and said, “That's simply the way the bankruptcy process works. We don’t make the rules,” He said the matter had been settled with the agency for a nominal sum.
Bankruptcy is never pretty. But, in this case, Sun Capital was particularly adept at getting what it wanted. Only months after Friendly’s went bankrupt, Mr. Leder has already regained control of the company. It was a calculated move, and one that is potentially lucrative for Sun Capital and its investors. In filing for bankruptcy, Friendly’s also cut hundreds of jobs and closed dozens of restaurants to buy some time to regroup. Now, if Sun Capital can turn around Friendly’s, it might eventually be able to sell the chain at a handsome profit.
Profit, after all, is what private equity is really about. Not creating jobs.
Jeffrey States is the investment officer for the Nebraska Investment Council, another Sun Capital investor. He said some private equity firms do provide information about how their dealings might affect things like jobs. But not all investors ask for such details. “The primary objective is returns,” Mr. States said
Early on Bain Capital had become the model and example for other corporate raiders.
Mr. Leder, for his part, has never been shy about turning a profit. He and another banker, Rodger R. Krouse, were working at Lehman Brothers when they saw the huge money-making potential of private equity. They hatched their plan to get into the business one April afternoon in 1995, after a meeting at Mr. Romney’s Bain Capital in Boston.
Marc J. Leder (L) and his partner Rodger R. Krouse
The executives at Bain Capital had been grousing about a deal in which
they had doubled their money. But the executives were lamenting that if they had sold sooner, they could have made much more.
On the plane back to New York, Mr. Leder and his partner Mr. Krouse sat stunned. “We’re looking at each other saying, this is an industry where double your money is not that good of a deal?”
At 10 the next morning, Mr. Leder and Mr. Krouse marched into their bosses’ offices at Lehman Brothers and quit. They then decided to base their new private equity firm in Boca Raton, and became its co-chief executives, believing the location would give them an edge in spotting potential acquisitions in the Southeast before their rivals in New York and Boston. But other private equity competitors kept outbidding them for companies.
It took 20 months, but they finally got their foot in the door. Their friends and family members invested in their first dozen deals. Mr. Mitt Romney also invested personally in some early transactions, including an acquisition of a company that made speakers for computers and another that made carbon paper. Monster buyouts.
Mr. Romney’s 2011 financial disclosures included stakes worth less than $15,000 apiece in two Sun Capital -controlled companies — a pittance, given his estimated wealth of as much as $250 million. A spokeswoman for Mr. Romney’s campaign did not respond to an e-mail or a call from the New York Times seeking comment.
Sun Capital soon carved a niche in doing turnarounds. In 1997, it acquired a majority stake in a maker of injection-molded polypropylene panels. By 2002, that company had more than doubled its sales.
One success led to another. Mr. Leder and Mr. Krouse invested $1.5 million in a company that supplied parts for Corvettes and walked away with $20 million. Two Sun Capital investors were so tickled that they bought each man a red Corvette.
As word got out about Sun Capital’s early investment successes, pension funds and endowments were soon clamoring to get into its
funds. Sun Capital raised fund after fund, each bigger than the last. In 2007, it raised $6 billion for a single fund.
Sun Capital had hit the big time.
Then the Great Recession struck, and the private equity boom turned bust fast.
By early 2009, numerous companies that Sun Capital had acquired were struggling to survive. Sun Capital was racked by internal dissent. And Mr. Leder’s personal life had hit a rough patch too.
By that spring, several Sun Capital companies, including Drug Fair, Big 10 Tires and Mark IV Industries, had spiraled into bankruptcy. The firm had already taken losses on a large deal, a hostile takeover of the fashion company Kellwood, which Sun Capital had acquired without the usual due diligence.
Then came other, more personal blows. Mr. Leder and Mr. Krouse both lost money that they had personally invested with Bernie Madoff.
Then Mr. Leder and his wife of 22 years, Lisa, began to go through a messy divorce. She demanded half of his total wealth, which
she contended was more than $400 million at the time. The two eventually settled for an undisclosed amount.
Sun Capital, its business in retreat, laid off a number of its own employees. Those who stayed were told they would receive no cash bonuses that year. Instead, everyone was given a bigger slice of the portfolio of companies that, at that time, was losing value every day.
Angry employees fired off a list of dozens of pointed questions to Mr. Leder and Mr. Krouse, asking how much money the two co-founders had been paid -- and how much they had taken out of Sun Capital. The employees wanted to know how a firm that had just raised a $6 billion fund, and which was collecting about $120 million a year in management fees alone, could possibly be running low on cash.
Mr. Leder and Mr. Krouse had, in fact, already paid themselves handsomely for their giant fund. As 50-50 partners, they kept the first year’s fees, in cash, for themselves, according to former employees. A spokesman for Sun Capital declined to comment.
They had learned very well from mister Mitt Romney. Mr. Leder said that even during its worst year, Sun Capital booked a small profit.
To critics who say that Sun Capital grew too big, too fast, Mr. Leder points to ShopKo, which it bought for $1.2 billion. Sun Capital brought in new management, freshened up stores and plans to merge it with another Midwest retailer, Pamida.
Sun Capital has already paid itself a dividend on that deal, and Mr. Leder says he expects it will generate big returns.
In a smaller deal, Sun Capital bought the Midwest retailer Gordmans for $56 million in 2008. It doubled its returns through two dividend payments and proceeds from the Gordmans initial public offering in 2010.
When asked if private equity could withstand the heat of election-year politics, Mr. Leder seems unfazed. He is among the top contributors to the political action committee Restore Our Future, a so-called super-PAC created to help Mr. Romney...but Mister Leder insists that his business isn’t politics, it’s private equity.
Gordon Gekko would have been very proud of Marc Leder and Mitt Romney today. Now tell us all about those off-shore bank accounts...
* An unedited version of this article, written by Julie Creswell, appeared in print on January 22, 2012 in the New York Times with the headline: "Vulture? Savior? It Depends."
My other posts on Mitt Romney:
- Mitt Romney, the Forbes Fortune 400, and Taxes
- How Mitt Romney & the 1% Evades Taxes
- Mitt Romney - Mister 15% and Platinum Parachutes
- Efficiency expert Mitt Romney: "You're expendable."
- Mitt Romney Knows Envy Better than Anyone
- Mitt Romney Connected to $8.5 billion Ponzi Scheme
- For Mitt Romney, the Joke's on Us