Venture Capitalism Explained

By Rob Janicki

Much has been said recently regarding Mitt Romney's time with Bain Capital, a private equity venture capital business.  Such attacks from the left are to be expected.  What was unexpected were the attacks by Gingrich and Perry on private equity venture captial firms calling Bain Capital, in particular, "Vulture Capitalism".  The comment was pointedly meant to cast aspersions upon Romney's business practices, if not his moral turpitude to lead as President of the United States, should he win the Republican party's nomination and go on to defeat Barack Obama on November 6, 2012.

In addition to attacking Romney, Gingrich and Perry attacked a perfectly legitimate business and financial practice.  Venture capital businesses engage in evaluating failing or marginally producing companies with the eye to making them profitable and thus successful.  Failing businesses have no option but to go through bankruptcy and bankruptcy courts have no business organization skills and no inclination to take on the task of reorganizing failing businesses.  That is the obligation of the failing business, which in Chapter 11 proceedings, must produce a new business model addressing the causes of the failing business model.  In Chapter 7 proceedings, the court simply liquidates each and every asset to cover the debt obligations of the business and, if there any assets left, to disperse those assets among the partners or shareholders of the business/

Often, this is where private equity venture capital groups step in to provide management analysis of the underlying causes of the conditions leading to the failing business model, along with proposed solutions.  Venture capital groups either buy into the failing business or buy out the failing business, so as to be able to assure their new business model will be put into place and thus raise the possibility of success.

So, who makes up these venture capital groups?  The Left would have people believe that VC groups are nothing more than greedy evil types of the ilk of the Robber Barons of the 19th century, raping and pillaging the business community to make a profit at the expense of hardworking everyday people.  Now Gingrich and Perry, in their ignorance, have joined the left in vitriolically condemning VC groups in general and Romney's association with Bain Capital in particular.

Venture capital groups are usually structured as limited partnerships.  Most VC groups, in addition to some wealthy individuals, are made up of public, private and union pension funds, charitable foundations, religious organizations and educational institutions, which seek to invest their institutional funds for growth to match the ultimate financial needs of their individual members or institutions.  Attacking VC groups as greedy evil capitalists is a self serving political wish to demonize opponents in the eyes of an unknowing public.   The next time someone attempts to demonize a VC group, perhaps they ought to also indicate exactly who or what constitutes the limited partnership of that VC group.  Even if the VC group is a limited partnership of several individuals, it still exists to make a profit by making the business profitable.  Liquidation of a business is a last resort, not a primary objective, of a venture capital group.  More profits are to be made from successful rehabilitation of a business, than from picking its bones for pieces to sell off.