BayPine, launched by former Silver Lake and Blackstone executives in 2019, amassed $3 billion of spending power for a strategy focused on upgrading the technology of old-line companies as a way to enhance operations and cut costs.
The strategy is one employed by several private equity firms, which look for otherwise strong performing businesses that need help building out an improved technology infrastructure. As tech reaches across sectors into every type of business, many companies don’t have the expertise to build out relevant technology.
These businesses would be strong performers even without a tech upgrade, but the digital transformation helps take them to another level, according to Anjan Mukherjee, managing partner at BayPine.
“We look for really good companies that are defensive in nature in great sectors that are growing well,” according to Mukherjee. “Old economy companies have a very hard time attracting new economy talent. We look for those businesses that are seeking help in making the digital transition.”
BayPine this week closed its debut fund, BayPine Capital Partners Fund I, on $2.2 billion, beating its $2 billion target. The firm also secured invested capital from co-investors, bringing its spending power up to $3 billion, the firm said in a statement.
BayPine was formed by Mukherjee, a former senior managing director at Blackstone, and David Roux, co-founder and co-CEO of Silver Lake.
Other founding partners include Wan Ling Martello, who worked as CFO at Nestle; Marius Haas, who joined from Dell Technologies, where he was president and chief commercial officer and helped in the take-private of Dell in 2013; Brian Frank, founder and managing partner of David Rubenstein’s family office, Declaration Partners, who also worked at MSD Partners; and Steve Ko, who joined from KKR, where he led the firm’s consumer and retail focus in the Asia-Pacific region.
The firm targets upper mid-market companies in healthcare, consumer, specialty industrials and business services sectors.
BayPine has deployed about a third of the fund across three platform investments: Penn Foster, a workforce development and online vocational skills company; Mavis Tire Express Services, an aftermarket tire and auto services; and Pinnacle Dermatology.
The firm is taking a cautious approach in the rising rate environment, keeping in mind that businesses bought today are likely to experience exit-multiple compression, Mukherjee said.
“It’s important to understand in a rising rate environment that what you are able to sell the business for at some point in the future is going to be heavily influenced by what rates are at, at that point in time,” he said. “So anticipating and planning for a lower valuation environment or exit multiple than what you paid going in will be really important.
“We believe we will have exit multiple compression in every deal we do and the numbers have to work on that basis,” he said. By building out technology in old-line businesses, BayPine is making them more valuable, which will serve as a hedge to rising rates and potential lower exit multiples in the future.
Tech-enabling businesses is a way to counter an inflationary environment, Mukherjee said.
“Technology in my view will become the primary deflationary driver in our economy. It’ll have to replace China, or the Asian supply chain, because the companies that can embrace technology the most rapidly will have an advantage – the more tech-enabled you are, the more efficiently you can operate on a relative basis to your competitor,” he said.
How it works
An example of the kind of digital transformation BayPine tries to achieve in companies it buys is Mavis, which sells tires and also services vehicles.
Mavis is a strong business, where “when you put up a new store in this business, you get your money back in a little over a year,” Mukherjee said. The company is “rolling up a fragmented industry, creating value by buying mom and pop tire businesses at 5x to 6x EBITDA.”
Mavis already has a strong position in the market, Mukherjee said. BayPine’s vision is to enhance the technology of both the consumer-facing and the back-end infrastructure sides of the business.
“Think about ordering a tire the way you order a latte on the Starbucks app or a pizza on the Dominos’ website,” Mukherjee explained about digitally enhancing the consumer experience.
Tech-enabling the back-end of the business is more complicated. Changes include using artificial intelligence-based data analytics to optimize the scheduling systems. “You might have a situation where there’s a line out the door after soccer practice every Sunday morning and people drive away,” he said. “If you had a more intelligent through-put model in your store and used an AI-based demand management system, you could avoid that, you could drive more through-put through the store and increase your revenues that way.”
Another change could be digitizing the inventory management system and supply chain “so you have the right tire in the right store at the right time,” Mukherjee said. “Often a customer will come in and you don’t have the right tire for them and they drive away and they might not ever come back.
“Those are examples of using technology to run the company more efficiently and also to grow the top line faster,” he said.