Bain Capital could be considered a trailblazer in private equity. Born out of consulting outfit Bain & Co. in 1984, Bain the buyout shop put aside the financial engineering model used by most early 1980sprivate equity shops, and was among the first to try its hand at creating value in order to drive returns. The shift for private equity may have not have been as immediately striking as the rise of break dancing after a decade of disco, but when Bain first introduced the idea of the consulting investor, not many were eager to hop on its bandwagon.
“It wasn’t usual for consultants to do private equity investing at the time, so it was pretty hard to raise that first fund,” says Stephen Pagliuca, a Bain Capital managing director. “As it turned out, the model of using consulting and analytic skills worked out pretty well.”
In fact, “pretty well” could be considered an understatement given the current limited partner thirst for value-added investing. To raise a fund these days, firms not only need to say they can effect change, but they also need a history that proves it. And as proprietary deals have all but disappeared, the financial engineering model has become a dusty remnant that more often than not belongs in the basement beside the Walter Mondale pins and Betamax videos.
“Right now probably 99% of properties [for sale] are intermediated and the success battlegrounds have shifted from finding [proprietary] deals to figuring out what new strategies you can bring to the table,” Pagliuca says. “This is in contrast to when Bain Capital first started, and the industry was comprised of ex-accountants and financial analysts…In a market like this, it’s vital to figure out how to strategically position a company.”
The Euro Approach
As the U.S. private equity industry has matured, some firms began looking overseas for transactions, where the hope was that the less developed buyout markets would spawn more proprietary deals. Bain was again one of the forerunners, having completed its first deal, the buyout of German book distributor Georg Lingenbrink, in 1989.
But no matter where the firm has found its deals, the approach for Bain Capital has stayed the same. “The European effort stemmed out of a similar investment approach to the one in North America, but executed with a team of professionals who are mostly European natives,” Pagliuca says. “When we really began looking at European deals in earnest, the region did not have the developed debt markets it does today, and without a common currency, very few buyouts were getting done.”
While Bain’s success in Europe has undoubtedly caught the attention of other firms looking to mirror its achievements, it wasn’t until 10 years after Bain’s entrance that the European buyout market really took off. With the introduction of the Euro as a common currency for the continent, coupled with the growth of Europe’s debt capacity, the European buyout market has taken great strides as an industry and the competition for deals can be as lively as in the U.S.
“What we’ve seen over the last three years is that European sellers are starting to differentiate among the funds,” says Dwight Poler, a Bain Capital managing director. “Five years ago, a lot of sellers didn’t want to sell to private equity. Now private equity is the primary buyer of properties in Europe, and sellers are most concerned with finding a sponsor who has a track record of closing deals and can add value post close.”
In the U.S., Bain is primarily associated with the higher-profile, large market transactions, which dominate the headlines here. Investments in Brookstone, The Sports Authority, Dominoes Pizza, Burger King, and Bombardier’s recreational division have solidified Bain’s status in the large market.
However, in Europe, Bain will be just as apt to go after a middle-market transaction as it would a deal in the large market, and the firm has structured its European fund to facilitate this approach.
“We have intentionally structured our fund and team size [in Europe] to provide us with more flexibility to actively pursue both the mid-market as well as large opportunities,” Poler says. “With a dedicated Europe fund that draws on the $3.5 billion global fund coinvesting in larger deals, we’re just as comfortable making the right EURO40 million equity investment in Europe as we would be making a EURO500 million equity investment…and this gives us a completely different kind of flexibility that competitors don’t have.”
And by looking at its activity in Europe, Bain has put to good use its ability to float between the large and mid markets. In the last two years, the firm has completed eight deals in Europe, ranging in enterprise value from $62.7 million, in the purchase of apparel retailer Jack Wolfskin, to $1.7 billion, in the acquisition of Deutsche Bahn’s Brenntag chemical and Interfer steel units. In all, Bain’s deals the past two years have an aggregate enterprise value topping off at around $5 billion.
The firm has also benefited from its European presence when buying U.S. based companies with a European parent, such as Houghton Mifflin or Burger King. “It’s an advantage we have, being able to deal with sellers with execution teams on both sides of the ocean,” Poler says.
Despite more than a decade in Europe, Bain has made no effort to alter its Boston-rooted, private equity elocution.
“Our initial thesis when Bain Capital started really had three legs,” Pagliuca says. “We wanted to develop an organization first that focuses on analytic and business strategy skills and use those skills to work with the management team to drive value. Second, we wanted to be active across a variety of industry sectors and develop an organization with complementary capabilities necessary to support this breadth of global coverage. And the third leg was to create a world-wide organization, so we could maximize deal flow and leverage our capabilities on a holistic basis.”
Poler adds, “Our goal in Europe is to emulate those practices that brought us such success in North America, and we have done and will continue to do so.”