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.
Yet Bain Capital, the privateequity firm that controlled the Michigan-based company, continued to collect its $950,000-ayear “advisory fee” in quarterly installments, even to the very end, according to court documents.
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.
That Bain was able to reap revenue from Cambridge, even as it foundered, was hardly unusual.
The private-equity firm, co-founded and run by Mitt Romney, held a majority stake in more than 40 U.S.-based companies from its inception in 1984 to early 1999, when 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.
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.”
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.
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.
“Bain Capital does not make money on investments when our investors lose money,” the company said in a statement. “Any suggestion to the contrary is based on a misleading analysis that examines the income of a business without taking account of expenses.”
In four of the seven Bainowned 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 aBain-led acquisition strategy.
On a few occasions, like with Cambridge Industries, Bain’s investors lost. Lucrative fees helped insulate Bain and its executives, records and interviews showed.
PILING ON DEBT
Having spun off from a management consulting firm, Bain has always been known for its data-driven, analytical approach. Under Romney, the firm scored some successes, enabling its investors - wealthy individuals and institutions such as pension funds - to collect stellar returns.
The companies that fell into bankruptcy were 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.
In at least three of the seven bankruptcies, however, companies appear to have been mademore vulnerable by debt taken on to return money to Bain and its investors in the form of dividends or share redemptions.
That was apparently 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.
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.
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.
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 investorprospectuses.
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 scaleback. 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.
SUBSTANTIAL FEES
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 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, such as 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.
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.
In 1998 alone, 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.
These fees covered Bain’s expenses - such as rent, salaries and lawyers - and the bulk of the remaining money was awarded to Bain employees as annual bonuses.
Bonuses were relatively small some years, like from 1989 to 1991, when the savings and loan 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.
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.
OFFSETTING LOSSES
When deals sour, however, fees can provide a hedge.
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.
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.
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 the fund a $2 million prepayment penalty.
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.
Eventually, Bain settled the dispute by paying $1.5 million to the bankruptcy trustee.
“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.” Information for this article was contributed by Mike McIntire of The New York Times.
Front Section, Pages 5 on 06/24/2012