FORTUNE -- Mitt Romney likes to talk about his time as a venture capitalist with Bain Capital, helping to launch corporate giants like Staples and The Sports Authority. His critics like to focus on Romney’s years as a leveraged buyout investor, highlighting (a handful of) deals in which Bain made money while its portfolio companies went broke. Job creator versus corporate raider.
Both narratives are largely legitimate, since Bain Capital diversified its investment activities during Romney's time at the helm.
But there also is another part of Romney's investment activities that neither his supporters nor his detractors seem to talk about: Mitt Romney, hedge fund manager.
Virtually all of Bain’s early investment activities were centered on long-term bets in the private markets, but there were exceptions.
In 1995, for example, the firm used its fourth private equity fund to purchase shares in a listed Florida record label called Alliance Entertainment. It didn’t go too well. Not only did Alliance file for bankruptcy two years later, but the company would accuse Bain of executing “short-swing” trades that generated over $2.9 million in profits that Alliance felt should be returned to the company (under rules stating that 10% shareholders must disgorge to the issuer any profits on trades made within a six-month period of one another). The two sides eventually settled for $750,000, without Bain having to admit any liability.
There also was a related class action lawsuit filed against Bain, in which the firm strenuously argued against requiring Romney – who had signed off on the trades – to be deposed.
One year after the Alliance trades, some Bain staffers began talking about wanting to launch their own public equities vehicle, to capitalize on perceived market opportunity (unrelated to Alliance, of course). It was a much different model – both in terms of mission and structure – than Bain had previously employed, but senior management didn’t want the staffers to go out of their own.
So Bain sponsored the launch of Brookside Capital in October 1996, to operate as an independent hedge fund underneath the Bain Capital umbrella. It was originally seeded with $30 million in Bain partner capital, and began soliciting outside commitments in 1997.
What was tricky about Brookside, however, was how it fit thematically within Bain. The firm had originally been launched by a group of management consultants who thought they could use their expertise to help young companies grow. They then expanded that model to leveraged buyouts, again believing that their consulting roots could help implement much needed changes at struggling businesses (or make strong businesses even stronger).
In both cases, Bain either would require control or at least a very powerful voice at the table. With Brookside, however, the positions would be relatively small and, in many cases, powerless to effect change.
A source involved in the decision-making explains in to me thusly: “The concept that there were informational advantages, all of course legal, that would help each of the businesses to perform better than they would as a standalone.” For example, Bain’s private equity group might identify potential market dislocations that the public equities team could trade against either short or long (it’s unclear how often, if ever, that theory was put into practice).
Conversely, Brookside could provide in-house public equities research that Bain otherwise would need to get from third-party analysts. There obviously were large legal firewalls when it came to things like pending take-private transactions or other non-public information for listed companies, but the justification for launching Brookside inside of Bain was synergistic in nature.
Brookside also helped further institutionalize Bain Capital – establishing a method for creating affiliates that later would include Sankaty Advisors (credit) and Absolute Return Capital (absolute returns). Today the group manages over $7 billion in assets.
Romney would be Brookside’s sole owner until leaving Bain in February 1999 to run the Salt Lake City Olympic Games, although he still had millions of dollars tied up in Brookside funds as of his most recent financial disclosures.
None of this is some huge secret. Brookside is mentioned on Bain Capital’s website, although you need a client password to actually enter the Brookside section. But it’s one of those things that has been largely ignored by both sides on the campaign trail, at least so far.
Considering that a President Romney would be asked to appoint regulators who oversee hedge funds, or to sign/veto new hedge fund-related regulations, it’s worth remembering that he used to own one.
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