(Reuters) - Bain Capital has been leading private equity firms in using a controversial financing strategy to generate low-tax special dividends for itself and its investors for nearly the last decade.

A Reuters analysis shows Boston-based Bain had done more "dividend recapitalization" loans from 2003 through last June than TPG Capital LP TPG.UL, Blackstone Group LP (BX.N) and other rival private equity firms.

Private equity firms, sometimes in consortiums with competitors, typically buy large stakes in established corporations with the goal of improving their performance and reselling them later at a profit.

Dividend recapitalization, which is legal, is a shortcut through this process. Instead of waiting to take profits when an acquisition is resold, the private equity firm arranges for the company to borrow money, either through a bank loan or a bond issue, often of speculative grade. The private equity firm then channels the proceeds to itself and its investors through a dividend.

Private equity firms also use this strategy to generate profits from companies they have already taken public, but which have not found a buyer or whose stock price is lagging.

Dividend recapitalization loans allow the private equity firm to extract some money from its investment while maintaining its control of it.

"It's a way to put some cash in your pocket but still have control of a company when it is attractive to buyers at a later point," said Joseph Doloboff, a partner with the law firm of Blank Rome who has been involved in some dividend deals, but none for Bain Capital.


Some have criticized the dividend recap strategy for saddling companies with debt and for the 15 percent U.S. tax treatment often applied to the payouts, which is far below the 35 percent top individual income tax rate.

"It seems like taxpayers are participants to the deals," said Chuck Marr, director of federal tax policy at the left-leaning think tank Center on Budget and Policy Priorities.

If Congress does not intervene, the 15 percent tax treatment of qualified dividends will end in January. Anticipation of a possible increase in the dividend tax has boosted dividend recap activity.

Bank-loan financed dividend recaps paid out a record $34.1 billion to private equity firms in the first nine months of this year, well above $25.5 billion for all of 2011, according to financial data tracker S&P Capital IQ.

Over the nearly 10-year period analyzed by Reuters, Bain helped arrange, or was one of the firms involved in, at least 12 bank-loan financed payouts worth nearly $11.9 billion. The deals included such household names as Dunkin' Brands Group Inc (DNKN.O) and Domino's Pizza Inc (DPZ.N), according to Thomson Reuters LPC.

Reuters could not determine if or by how much Mitt Romney, the unsuccessful Republican presidential candidate who co-founded Bain Capital, benefited from the firm's use of the dividend recapitalization strategy. Romney, who headed Bain Capital from 1984 to 1999, owns stakes in many of its funds.

A spokeswoman for Romney during the 2012 political campaign referred questions to Bain Capital spokeswoman Charlyn Lusk, who declined to comment for this story.


Compared with Bain, other private equity firms were involved in fewer dividend recapitalization deals during the period Reuters analyzed.

Here are the number and total value of deals involving Bain and some of its rivals from 2003 through June 2012, according to LPC.

Private equity firm Number of deals involving firm Total value of deals Bain Capital 12 $11.89 billion TPG 6 $7.15 billion Blackstone 6 $4.56 billion Thomas H. Lee Partners 3 $3.82 billion Apollo Investment Corp (AINV.O) 8 $3.76 billion KKR & Co LP (KKR.N) 6 $3.33 billion

The LPC data excludes payouts financed by bonds instead of bank loans. While bond-financed payouts surged in 2010 and 2011, they have historically been about a third or less of total payout volume, according to S&P Capital IQ.

KKR, Apollo and TPG declined to comment; Blackstone and Thomas H. Lee did not respond to requests for comment.

Some dividend recap payouts are not considered qualified dividends but nontaxable returns of capital to investors. It is not known how many payouts by companies owned or controlled by Bain or other private equity firms have qualified for the zero-percent tax treatment.

(Editing by Kevin Drawbaugh, Howard Goller and Lisa Von Ahn)

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  • SEC Filings List Romney As 'Chief Executive Officer'

    According to the <em><a href="http://www.boston.com/news/politics/articles/2012/07/12/government_documents_indicate_mitt_romney_continued_at_bain_after_date_when_he_says_he_left/" target="_hplink"><em>Boston Globe</em></a></em>, Securites and Exchange Commission documents filed by Bain Capital after February 1999 list Romney as the private equity firm's "stole stockholder, chairman of the board, chief executive officer, and president."

  • $100,000+ Salary

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  • 2002 Testimony

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  • More SEC Filings

    HuffPost's Jason Cherkis and Ryan Grim identified at least <a href="http://www.huffingtonpost.com/2012/07/13/mitt-romney-bain-sec_n_1671819.html" target="_hplink">six documents</a> filed by Bain Capital with the SEC from 1999 to 2001 that were signed by Mitt Romney. Most of the documents refer to Romney as the "reporting person."

  • 'Managing Member' In 2002

    HuffPost <a href="http://www.huffingtonpost.com/2012/07/15/mitt-romney-bain-capital_n_1674209.html?utm_hp_ref=politics" target="_hplink">reported</a> on a 2002 corporate document filed with the state of Massachusetts that shows Romney listed as one of two managing members of Bain Capital Investors, an entity of the private equity firm.

  • Signed Documents After 1999

    Romney signed an SEC filing in November 1999 pursuant to Bain's partial acquisition of medical-waste firm Stericycle, <em><a href="http://www.motherjones.com/politics/2012/07/mitt-romney-bain-financial-disclosure" target="_hplink">Mother Jones</a></em> reported. The filing noted that he was the "sole shareholder, Chairman, Chief Executive Officer and President" of the Bain entities involved in the $75 million deal.

  • 2001 & 2002 SEC Filings

    <a href="http://talkingpointsmemo.com/archives/2012/07/no_romney_didnt_leave_bain_in_1999.php" target="_hplink">Talking Points Memo</a> uncovered two SEC filings from July 2000 and February 2001. In both, Romney lists his "principal occupation" as "Managing Director of Bain Capital, Inc."

  • 1999 News Reports

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  • Former Partner Speaks Out

    A former Bain Capital partner, Ed Conard, said during an appearance on MSNBC's "<a href="http://upwithchrishayes.msnbc.msn.com/_news/2012/07/15/12751962-former-bain-capital-partner-says-romney-was-legally-ceo-of-bain-capital-until-2002" target="_hplink">Up W/Chris Hayes</a>" that Romney was "legally" the CEO and sole owner of Bain Capital until 2002, as an ownership battle dragged on after Romney left to take over the Salt Lake City Olympics. "We had a very complicated set of negotiations that took us about two years for us to unwind. During that time a management committee ran the firm, and we could hardly get Mitt to come back to negotiate the terms of his departure because he was working so hard on the Olympics," Conard said.

  • Relationships With Problematic Companies

    HuffPost's Sam Stein <a href="http://www.huffingtonpost.com/2012/07/16/mitt-romney-bain-capital_n_1677133.html" target="_hplink">reported</a> that SEC filings link Romney to politically problematic companies after his alleged 1999 departure from Bain: <blockquote>A Huffington Post review of SEC files unearthed six separate occasions in which Romney was listed as a member of "the Management Committee" of both Bain Capital Investment Partners and BCIP Trust, "deemed to share voting and dispositive power with respect to" shares held of DDi. In one of those filings, Romney is listed as president and managing director of Bain Capital, Inc. The dates of those filings range from April 14, 2000 to May 10, 2001 -- all after Romney had left for Salt Lake City. In one March 2001 filing, Romney signed the document as the "reporting person."</blockquote>

  • 'General Partner'

    According at a <a href="http://www.huffingtonpost.com/2012/07/16/mitt-romney-bain_n_1677259.html" target="_hplink">document</a> filed with the California Secretary of State's office in July 1999, Romney was listed as a "general partner" at Bain Capital Partners. Romney's signature appears on the document. Romney remained on record as a general partner until California was notified of his resignation in June 2003.