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Exclusive: Bain may seek $6 billion-$8 billion for new fund: sources

Reuters News
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Posted: Apr 10, 2012 3:31 PM
Exclusive: Bain may seek $6 billion-$8 billion for new fund: sources

By Greg Roumeliotis and Paritosh Bansal

NEW YORK (Reuters) - Bain Capital LLC is considering raising $6 billion to $8 billion for a new global buyout fund and offering investors up to three options on fees it charges to manage the money, according to two people with direct knowledge of the matter.

Bain, once headed by Republican U.S. presidential candidate Mitt Romney and still regarded as one of private equity's powerhouses, may start fundraising as early as this summer for its 11th global buyout fund, Fund XI, the sources said.

Taking into account co-investments - money coming from a supplemental fund that invests in deals - Bain has told investors the offering could reach $8 billion to $9 billion, compared with the total $12.7 billion for its previous buyout fund, Fund X, they added. Excluding co-investments, the core Fund X vehicle was $10.7 billion.

Bain declined to comment.

A tougher fundraising environment for private equity funds has prompted many managers to scale back their multibillion-dollar offerings. It has also led to Bain toying with its fee structure to attract more investors.

In 2011, private equity firms raised just $263 billion for deals, less than half the $600 billion they pulled in at the peak of the buyouts boom before the financial crisis of 2008.

This is because limited partners - pension funds, endowments and other investors in these funds - have scaled back their private equity investments. Moreover, a number of institutions such as banks and insurers are pulling back from the market.

Private equity firms have historically used the 2/20 fee structure, charging a 2 percent fee to manage the assets and 20 percent of the profits from investments, also known as carried interest. The carried interest kicks in once the profits reach a certain rate of return, called the hurdle rate.

Seeking feedback from investors, Bain has discussed charging as little as 0.5 percent in management fees and applying a hurdle return rate as low as zero for its eleventh buyout fund, the sources said.

Bain may still ask for a 30 percent carried interest rate as it targets investors willing to pay more for incentive compensation in exchange for lower management fees.

ASIA FUND

The ideas have been inspired by Bain's success of offering two fees options for its second Asian fund - 2 percent management fee and a 20 carried interest with a 7 percent hurdle rate, or 1 percent management fee and 30 percent carried interest with a 10 percent hurdle rate, the people said.

The private equity group is close to reaching its $2 billion fundraising target for its second Asian fund, with final fundraising close expected within a few weeks, one source added.

The fundraising effort was boosted by the performance of Bain Capital Asia Fund I, a $1 billion fund launched in 2007, which is currently valued at about 1.4 times its cost, that person added.

The fund has been boosted by deals such as the sale of Feixiang Chemicals in China to specialty chemical producer Rhodia, in which Bain made four times its money.

In the latest global buyout fund, Bain may offer as many as three different fees options, the people said.

Low management fees may put pressure on publicly listed alternative asset managers such as Blackstone Group LP and KKR & Co LP, who rely on fees to pay dividends to shareholders, to cut fees as well. Bain has been striving to diversify beyond endowments, foundations and wealthy families and individuals - which together constitute about 65 percent of its pool of investors - to include more pension funds and sovereign wealth funds, some of which are wary of overpaying for management fees. Bain Capital Fund XI will receive an outsize commitment from Bain itself to demonstrate strong alignment of interest with investors, one of the people said. About 15 percent of commitments in Asia Fund II are from Bain Capital employees.

The firm has made no final decision on the target size of Bain Capital Fund XI, its fee structure, the co-investment component or the launch date for the fundraising, the people said.

(Reporting by Greg Roumeliotis and Paritosh Bansal in New York; Editing by Gerald E. McCormick, Matthew Lewis and Gunna Dickson)