What Debt Did for Romney

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http://www.newyorker.com/online/blogs/comment/2012/01/what-debt-did-for-romney.html



The most interesting line in the G.O.P.’s official response to the State of the Union address was Mitch Daniels’s assertion that the United States is in big trouble because “no entity, large or small, public or private, can thrive, or survive intact, with debts as huge as ours.” Unsurprising as the attack was, its phrasing inadvertently underscored the curious reality of this year’s election; namely, that the same party that loves to inveigh against the dangers of excessive borrowing is now likely to nominate for President a man whose entire career, and entire fortune, was built on debt. Leveraged-buyout firms like Bain Capital, which Mitt Romney ran between 1984 and 1999, routinely borrow massive sums in order to make their acquisitions, leaving companies with debt loads equal to twice their annual sales or more. (Last year, for instance, the L.B.O. firm Apex Capital borrowed five billion dollars to acquire the medical-technology firm Kinetic Concepts, a company with annual revenues of around two billion dollars.) And they do so while borrowing at much higher interest rates than the federal government has to pay.

L.B.O. firms do borrow less these days than they did in the nineteen-eighties. But they still typically borrow sixty to seventy per cent of the value of the deals they do, and it’s difficult to overstate the centrality of debt to their business model. As a study of a hundred and fifty-three large buyouts showed, companies acquired by L.B.O. firms borrow more than similar public companies. In that sense, one the core advantages of L.B.O. firms is simply their willingness, and their ability, to borrow huge sums of money.

The debt helps juice the firms’ investment returns—as with any investment, the less you put down, the higher your returns will be (assuming things don’t go bust). It also makes them dependent, to a great degree, on credit markets—when credit is loose, as it was for most of the aughts, it’s easy for private-equity firms to make their returns look good (at least in the short run). When credit gets tighter, as it did after 2007, it becomes much harder to do so. As one private-equity manager says in a recent paper by Ulf Strömberg, Tim Jenkinson, Per Axelson, and Michael Weisbach, “Things are really tough because the banks are only lending 4 times cash flow, when they used to lend 6 times cash flow. We can’t make our deals profitable anymore.”

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