GP Profile: Bain Capital Pursues New Strategy In China

Firm: Bain Capital

Capital Under Management: $60 billion

Headquarters: Boston; Asia offices in Shanghai, Hong Kong, Tokyo, and Mumbai.

Asia Strategy: Invests $40 million to $70 million in growth equity and majority-stake deals in Asia; can draw on capital from its global buyout fund for larger deals.

Investment Professionals: About 30 investment professionals in China, 20 in Japan and 14 in India.

When the Boston buyout shop first opened an office in Hong Kong in 2005 it planned to do deals related to China’s then-thriving export economy. But about 18 months ago, with exports suffering from the global economic recession, Bain Capital shifted its focus to businesses that cater to the Chinese consumer, drawn by the estimated 40 million people that will enter China’s middle class every year for the next 15 years.

“For us, the big long-term trend that’s most attractive is largely driven by the development of middle-class consumers in China,” said Paul Edgerley, a managing director at the firm with strategic responsibility for Asia. “There’s a tremendous amount of growth.”

Bain Capital, famous for its consulting-oriented approach to investing, is also encouraged by an anticipated economic recovery in China. The recovery is supported both by Chinese banks, which lent out more than $1 trillion in the first half of the year, and the government, which has pumped $600 billion of stimulus money into the economy. And, in a sign that China is growing friendlier to foreign investors, the government announced plans earlier this year to build Shanghai into a global financial hub by 2020 through such measures as allowing foreign firms to raise yuan-based funds more quickly and easily.

Exemplifying Bain Capital’s shift in strategy is its latest and largest investment in the region to date, a $200 million investment in GOME Electrical Appliances Holdings Ltd., a Hong Kong-based retailer of electrical appliances. Bain Capital’s investment will make it the second largest shareholder in GOME with a stake that could reach 10 percent with the conversion of convertible bonds and depending on shareholder response to an offering of new shares that the firm is underwriting.

Founded in 1987, GOME is among the largest retail chains in China, with 859 stores in 205 cities, up from fewer than 300 stores in 2005. In a statement announcing the agreement, GOME Chairman and President Chen Xiao noted Bain Capital’s experience investing in retail businesses, saying the Bain Capital team will strengthen its management and operational expertise while enhancing its corporate governance and providing a solid financial base for future growth.

GOME is a somewhat atypical Asian investment for Bain Capital, which usually invests $40 million to $70 million in growth equity deals. Generally, 85 percent of the money earmarked for an Asia deal comes from Bain Capital Asia LP, the $1 billion fund the firm amassed in 2006 to target the region, with the rest coming from Bain Capital Fund X LP, an $11.5 billion global buyout fund raised in 2007. Bain Capital drew on both funds for the GOME investment. Executives at the firm are currently monitoring the progress of yuan-based funds, such as the 5 billion yuan ($732 million) fund recently launched by The Blackstone Group.

Altogether Bain Capital has made nine investments in Asian companies, six of which are in China. Besides GOME, they include Tralin Pak, a company that makes aseptic packaging for liquid food for companies in China and around the world (Bain Capital invested an undisclosed amount for a minority stake in 2006); and JinSheng International, an operator of shopping malls in China (Bain Capital partnered with CBL & Associates Properties Inc., a Chattanooga, Tenn.-based real estate investment trust, to invest $60 million for a minority stake in February 2007).

Edgerley, who has worked at Bain Capital since 1988, said he expects the firm to make anywhere from two to four deals in Asia over the next 12 months, though it’s willing to sit on the sidelines if the opportunities aren’t ideal. After the GOME deal, Bain Capital Asia LP is about one-quarter spoken for. Bain Capital plans to focus the majority of its attention on China, Japan and India—and within those three countries, the majority of its attention will be on China. Still, the firm is also eyeing an expansion into Singapore and Korea. Bain Capital was reportedly one of the suitors, along with The Carlyle Group, for Oriental Brewery, the Korean brewer that Kohlberg Kravis Roberts & Co. and Affinity Equity Partners, a Hong Kong-based private equity firm, bought in July for $1.8 billion. Execs at the firm declined to comment on that deal. “We’re planning to cover Singapore and Korea both out of Hong Kong and Japan, but we do believe that in the long term we’re going to need semi-dedicated resources in these markets, which would probably mean people in-country,” Edgerley said.

Poised For Action

Bain Capital is prepared to finance growth equity deals in China and elsewhere in Asia thanks to the resources it has dedicated to the region.

After openning that first office in the region in Hong Kong in 2005, the firm followed that with office openings in Shanghai and Tokyo in 2006. Last year, it opened an office in Mumbai. When it launched Bain Capital Asia LP in December 2006, Bain Capital had 27 investment professionals based in China and Japan. Today it has more than double that amount for the region as a whole, with about 30 investment professionals in China, 20 in Japan and 14 in India. By contrast, the firm has fewer than 40 investment professionals in Europe, where it has invested since 1989. But unlike Europe, where countries are smaller and closer together, “India is geographically distant from Japan and China and, from a business point of view, quite distinct,” Jonathan Zhu, a Hong Kong-based managing director for Bain Capital, told Buyouts. “So we need to have teams to cover each of the main markets and for that reason we need a larger team overall.”

Some of the key professionals in China include Edgerley; James Hildebrandt, a managing director who helped establish Bain Capital’s offices in China and has been with Bain for nearly 20 years; Ian Reynolds, a managing director who has been with Bain Capital since 1996; and Zhu, who joined the firm in 2006 after an investment banking career at Morgan Stanley, where he was CEO of its China business sector.

The Asia team also takes advantage of the expertise of its professionals in the United States and elsewhere when needed. Joshua Bekenstein and Jordan Hitch, Boston-based managing directors at Bain Capital that helped the firm in 2006 with its $6 billion acquisition alongside Blackstone of Michaels Stores, advised the Asia team on the GOME deal. “It wasn’t just a case of [the] Asia [team] doing a deal and seeking a rubber stamp from the U.S.,” a non-Bain Capital source who worked on the deal told Buyouts. “The team in the U.S. was very involved in the decision-making process.”

The size of Bain’s Asia team suggests it is serious about keeping up with its U.S. rivals. Blackstone, which closed its first investment in China in 2008, has more than 20 investment professionals based in Asia, while KKR, which raised a $4 billion fund targeting the region in 2007, has more than 30. TPG, which closed a $4.25 billion Asia fund in 2008 and has been in the region for more than 10 years, has more than 45 professionals. The Carlyle Group, which has also had a presence in Asia since the 1990s, has 113. “We’re great believers that you should only go places where you can be a best-in-class investor; to do that you need scale in the team,” Edgerley said. “We don’t think you should just put your toe in the water.”

It will take quite a few more years before Bain Capital and its U.S.-based competitors can prove to their respective investors that the attention devoted to Asia is justified. Of Carlyle’s five growth equity and buyout Asia-focused funds, only one, Carlyle Asia Partners (PV II)LP, raised in 2000, has yielded a positive return. The rest, as well as Bain Capital’s, KKR’s, and TPG’s funds, are all so far generating negative returns, though all of them are still young.

Said Edgerley: “This is about generating extraordinary returns over time, not about putting money to work.”