Bain Expected To Cast Wider Net For Fund X

With an offering memorandum expected to go out this month, Bain Capital has shifted its fundraising engine into high gear. But the Boston-based firm may have to work a little harder for commitments this time around before holding a closing, expected to take place in October.

Needless to say, nothing has tarnished its solid-gold image. The firm has plenty to show investors, having embarked on a flurry of exits and acquisitions in the last month alone, including the exit of Sigma Kalon, a Netherlands-based company that produces architectural, protective, marine and industrial coatings. Bain Capital sold the company for $3 billion to PPG Industries Inc.

But fundraising efforts for Bain Capital X LP—composed of a $10 billion main fund and a $5 billion co-investment vehicle—began barely 16 months after its $10 billion predecessor closed, a relatively short respite for a firm that usually allows two to three years between fund raises. When fundraising closed on Bain Capital IX LP, the firm’s CFO, Mike Goss, told Buyouts that the vehicle would last three or four years. “We don’t raise funds with the intention of investing them in two years,” he said. Returning to the well so soon after Fund IX—which closed on March 31, 2006, with $8 billion in the main fund and a $2 billion co-investment vehicle—may pose some challenges for the LBO firm.

In the past, Bain Capital has been able to raise funds largely by tapping its existing pool of investors, heavily comprised of foundations and endowments such as Princeton University Investment Corp., the Metropolitan Museum of Art and Alaska Permanent Fund Corp. Those organizations don’t have the deep pockets of public and corporate pension funds, however, and the recent industry-wide rash of fundraising has tapped out many limited partners’ allocations. The result is that some of Bain Capital’s potential LPs may not be able to commit to a fund so soon, leaving the firm to consider commitments from a fresh crop of backers.

“I would say the new phenomena for them this time around … is that they’ve really had to beat the bushes to try to get some new investors to commit,” said a source at one of Bain Capital’s limited partners. Another industry source acknowledged that it’s likely Fund X will take commitments from a larger number of pension funds than prior funds, but said the lion’s share of commitments will still come from existing investors.

Public pension funds have the deep pockets endowments and foundations lack, but can be far more ticklish on certain issues. In the past, some have been reticent to commit to Bain Capital because the firm pockets a premium rate of carried interest—30 percent on its main fund vs. the standard 20 percent charged by most firms, according to the LP source. In addition, because Bain Capital has engaged in a number of club deals, investors may feel that they can gain exposure to the same transactions without paying that premium, our LP source said.

When it first moved to a premium carry, Bain Capital justified the shift in part by pointing to its unusually deep bench of investment professionals; it softened the blow by raising its preferred return. In addition, the buyout shop only charges 30 percent carried interest and a standard two percent management fee on the $10 billion main fund. As with past Bain Capital funds, the $5 billion co-investment fund charges a 20 percent carry and takes no management fee until the money is invested.

Fund X is Bain Capital’s fifth fund to employ a co-investment vehicle.

Bain Capital may need to close on capital shortly if it is to continue feeding its recent appetite for deals. Within the past three months alone, the firm has wrapped up a number of deals. In addition to buying the kitchen and bathroom division of American Standard for $1.76 billion, Bain Capital won the auction to acquire Brakes PLC, one of Europe’s biggest food service providers, for £1.4 billion ($2.8 billion). Bain Capital and Thomas H. Lee Partners received antitrust clearance to buy Clear Channel Communications for $19.4 billion. And in late June, the firm bought Guitar Center Inc., a retailer of guitars, keyboards and professional audio equipment, for a total deal price of $2.1 billion, and picked up German yacht builder Bavaria Yachtbau GmbH for €1.3 billion ($1.78 billion). The firm is also rumored to be eyeing 3Com Corp., a networking equipment vendor.

On the exit side, federal regulators in July approved the firm’s exit of luggage giant Samsonite Corp., which it owned roughly 85 percent of, together with Ares Management and the Ontario Teachers’ Pension Plan.—J.P.