It’s been 10 years since
Made public while marketing its sixth fund in 1998, the unprecedented percentage was criticized by industry sources as a “bane” for Bain Capital, according to the January 26, 1998, issue of Buyouts. Looking back, the move was no fatal error as Bain Capital’s oft-oversubscribed funds, 30 percent rates intact, have grown in size by more than 10x over the decade.
A 10 percentage point jump in carried interest wasn’t the only change made to Bain Capital’s sixth fund. To mollify potential protests from investors, Bain Capital simultaneously raised its hurdle rate, which is the return rate GPs must achieve for investors before a carry is permitted. The Boston-based firm also raised its first companion co-investment fund, then called a “standby fund,” which charged a more traditional 20 percent carried interest rate. The co-investment fund was created to invest alongside its main fund in deals requiring larger chunks of equity.
Bain Capital surpassed its $700 million target with $1.1 billion for its sixth vehicle but fell short of its $300 million co-investment fiund target, closing at $170 million. Investors quoted in Buyouts criticized the standby fund, saying it appeared inferior to Bain Capital’s main fund. Those doubts have dissipated over time, and a number of firms, including
Ten years later only
The days of the 20 percent rate may soon change if Congress follows through with proposals to raise the tax rate on carried interest. Firms have suggested they could respond to a tax hike by increasing theircarried interest. Limited partners, for their part, have recently been fending off proposed rate increases from several top-tier firms, according to Buyouts.
The anniversary of Bain Capital’s changes arrives as the firm nears the close of its tenth fund, Bain Capital X LP. As reported in Buyouts, the firm is targeting a $10 billion main fund and $5 billion co-investment vehicle. True to its original incarnation, the side fund will charge a 20 percent carried interest rate.