NEW ROMNEY VIDEO: In 1985, He Said Bain Would "Harvest" Companies for Profits

A "harvest" or "exit" is an event whereby the investors and management of a company sell at least a portion of their shares to public or corporate buyers. The harvest provides an opportunity for private equity (PE) funds to realize returns for their investors, while enabling managers with equity stakes to have a "liquidity event" for their shares -- in other words, an opportunity to sell their shares by making them "liquid."

Along these lines, there are three primary methods by which PE funds harvest companies: initial public offerings (IPOs), mergers, and acquisitions. The latter two exit methods (discussed in subsequent chapters) are frequently discussed in parallel and are collectively known as M&A transactions.

In 1992, Bain Capital bought American Pad & Paper by financing 87 percent of the purchase price. In the next three years, Ampad borrowed to make acquisitions, repay existing debt and pay Bain Capital and its investors $60 million in dividends.

As a result, the company’s debt swelled from $11 million in 1993 to $444 million by 1995. The $14 million in annual interest expense on this debt dwarfed the company’s $4.7 million operating cash flow. The proceeds of an initial public offering in July 1996 were used to pay Bain Capital $48 million for part of its stake and to reduce the company’s debt to $270 million.

From 1993 to 1999, Bain Capital charged Ampad about $18 million in various fees. By 1999, the company’s debt was back up to $400 million. Unable to pay the interest costs and drained of cash paid to Bain Capital in fees and dividends, Ampad filed for bankruptcy the following year. Senior secured lenders got less than 50 cents on the dollar, unsecured lenders received two- tenths of a cent on the dollar, and several hundred jobs were lost. Bain Capital had reaped capital gains of $107 million on its $5.1 million investment.

This enables us to study how the four main aspects of venture capital and private equity – valuation, deal structuring, governance, and harvesting – are conducted in different legal and regulatory settings, under different customs, culture and business practices. The case method is used to demonstrate the practical, hands-on application of techniques following their development in class.