Explaining Southern California's economy

Mitt Romney and Bain Capital: He did what he had to do

Republican presidential hopeful Mitt Rom

JEWEL SAMAD/AFP/Getty Images

Mitt Romney has been taking it on the chin from the unlikeliest of places: his fellow Republican candidates, especially Newt Gingrich, have claimed that Romney's time at private-equity firm Bain Capital was all about killing jobs, not creating them. Mitt says he "created" 100,000 jobs. Not so fast, say his detractors.

At the Huffington Post, Robert Lipton explains why this he-said/he-said doesn't entirely make sense:

The reality is both more simple and more complex than all those allegations would have one believe. It is simple because the function of Bain and other private equity funds has no planned relation to job creation or job losses. It is more complex, because the activities of Bain do tell us something about Mitt Romney -- having nothing to do with jobs. Let's look at how Bain and other private equity companies actually operate.

The business goal of private equity companies is to make profits for investors in the equity funds they manage. The greater the profits for the investors, the larger the take of the fund managers, who typically receive a base management fee of about 2 percent plus a portion of the fund profits, generally around 20 percent. If the fund manager is very successful then the manager's participation in profits may run as high as 30 percent, which investors may be prepared to accept just to be able to invest with that manager. We're told that Bain was very successful in creating very high returns on investment for its investors, said to be an astounding 88 percent per year, to the point where it could get 30 percent participation in profits. One tax advantage of the fund mangers is that although their business is to get paid by creating values, unlike other payment for services, which is taxed as ordinary income, their return for their services is treated as capital gain and taxed at the lower capital gains rate.

Read More...