Bain moves past election

Bain Capital took more of a battering than any other firm in the industry this year, as founder Mitt Romney battled President Barack Obama for the presidency.

Last week, the firm sent a letter to its limited partners expressing gratitude for their patience through the election season, and assured LPs that, despite the harsh rhetoric, Bain Capital never wavered from its mission of generating solid returns.

“We have produced results for our investors by focusing on a concept that is simple to articulate but that takes insight, diligence and tremendous effort to execute: building and growing great companies,” Bain wrote in the letter.

But when it comes to fundraising, bad press may be the least of its worries.

In fact, as limited partners consider committing to Bain’s latest fund offering (its flagship Fund XI, which is targeting $6 billion), they don’t appear to be concerned about the media negativity. “From a pure investment standpoint, I don’t think [it] will have much of an impact,” one existing Bain Capital LP told PEI recently.

What they are concerned about, however, is what they see as the muted performance of the firm’s recent big funds.

The $8 billion Fund IX, for instance, was producing a 6.9 percent net IRR through September, according to LPs.

However, LP frustration has been mitigated by a couple of factors – notably Bain’s focus on operational improvements, which sources said have helped essentially “save” Fund IX. Bain has a 71-member operations team that, during the crisis, was able to help portfolio companies. As a result, the firm expects Fund IX to end up “in the middle of the pack” for that 2006 vintage, according to several LPs who saw an investor presentation at Bain’s recent annual meeting.

The $10 billion Fund X, a 2008 vintage, is a more complicated story. Performance has so far been underwhelming: it was generating a 0.99x multiple and a -0.6 percent internal rate of return as of 31 March, 2012, according to a source with knowledge of the firm’s performance. In August it lost one of its portfolio companies, Contec Holdings, a cable box repair business, which filed for bankruptcy.

However, LPs who talked to PEI expressed optimism for the fund. About 22 percent, or $2.2 billion, of Fund X was invested prior to the global financial meltdown in 2008, several LPs said, citing the investor presentation. The firm invested nothing in 2009, but slowly got back into the market in 2010.

The ‘post-crisis’ part of the fund is about $5.3 billion, according to the information, which makes the fund relatively young; more like a 2010 vintage than a 2008 vintage. In which case, it’s still early to gauge performance effectively.

Further, the underlying investments in the fund look strong, according to one existing Bain LP who is considering re-upping in Fund XI.

Fundraising on the XI vehicle could be helped by some LP-friendly terms. The firm is offering three classes of fees: Class A will get 1.5 percent management fee and 20 percent carried interest with a 7 percent preferred return; Class B gets a 1 percent management fee, 30 percent carry with a 7 percent preferred return; and Class C offers a 0.5 percent management fee, 30 percent carry and no preferred return.

Bain Capital has also boosted its GP commitment to 10 percent and will use 100 percent of any transaction fees to offset the management fee, LP sources said.

The firm hopes to repeat the success it had with its second Asia fund, which it closed earlier this year on $2.3 billion.

Potential investors have a lot to think about. But the general sentiment among LPs seems to be Bain’s operational focus, its historic track record (mostly in the first quartile except for the two recent funds, one LP said), and the attractive terms still make it a good bet.

Yes, there are still some doubts. But on the plus side, there’s one thing they aren’t thinking about at all: Mitt Romney.