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Bain to seek $6 billion for new buyout fund: sources
May 30, 2012 / 1:12 PM / 6 years ago

Bain to seek $6 billion for new buyout fund: sources

NEW YORK (Reuters) - Bain Capital LLC aims to raise $6 billion for its new global private equity fund and will take the innovative step of offering three options on the fees it charges to manage the money in an effort to widen the fund’s appeal, according to people familiar with the matter.

At a time when Bain’s former boss and co-founder, Republican presidential nominee Mitt Romney, is asking Americans for their vote, the private equity firm will be asking for money from the nation’s pension funds and endowments, as well as institutional investors across the globe. The new fee structure is meant to attract pension funds and other investors concerned about fees.

Bain is preparing to kick off fundraising for the new $6 billion fund, Bain Capital Fund XI, by the end of June, the sources said. Fund X, the firm’s previous global fund, raised $10.7 billion.

Bain Capital Fund XI will receive a $600 million commitment from the firm’s fund managers to show they are personally invested in the fund’s success, the sources said.

A fundraising close, marking the securing of commitments from investors, could come as early as the first quarter of 2013, the sources said.

Bain has told investors that a $2 billion co-investment fund will be raised alongside Fund XI and that access, as well as terms that investors get on that fund, will be tied to the size of their commitment to the core fund, they said.

Bain declined to comment.

Romney’s political opponents have criticized his record at Bain. But the Boston-based firm says it has created hundreds of thousands of jobs in its 28-year history and supported hundreds of charities. Bain investors contacted by Reuters in March, including some of the largest U.S. public pension funds, said political attacks made no difference in their assessment of Bain and that their focus was on returns and the fees being charged.

Bain can also point to recent fundraising success. It has told investors that its second Asian fund will be wrapping up fundraising this week, having reached its target of $2 billion.

FUNDRAISING

The firm, which boasts about $60 billion in assets under management, has decided on a modest fundraising target for Fund XI, seeking about 44 percent less than its previous fund. Sources told Reuters in April the firm was considering raising between $6 billion and $8 billion.

It is tough environment for private equity, with 23 funds raising an aggregate $18.5 billion in the first quarter and taking an average of 20.9 months to raise the money, topping the previous average high of 20.4 months for funds closing in 2010, according to market research firm Preqin.

Bain has told investors the lower fundraising target relates to opportunities in the market, the sources said. The money per deal the firm will likely have to provide as equity is now between $200 million and $500 million, Bain has told investors, as financing conditions still remain challenging for mega-deals.

Should an attractive opportunity come up that requires an equity check in the range of $1 billion, such as Bain’s investment in Japanese restaurant chain Skylark Co Ltd, the firm could rely on its co-investment fund to chip in, it has told investors, according to our sources.

At $6 billion, Bain’s new fund is at the low end of the major buyout funds based on the capital targeted. Warburg Pincus LLC is raising a $12 billion fund, while KKR & Co LP and Carlyle Group LP are each raising $10 billion funds.

FEES

Private equity firms have historically used the 2/20 fee structure - charging a 2 percent fee to manage the assets and 20 percent of investment profits, a cut known as carried interest. The carried interest kicks in once the profits reach a preferred rate of return, usually 7 or 8 percent.

But Bain has told investors they will have different options. The one seen by investors as more conventional will be based on a 1.5/20 fee structure with a 7 percent preferred return rate, the sources said.

A second option will be a 1/30 fee structure, geared toward making fund manager remuneration more performance-based, with the preferred rate of return set again at 7 percent, they said. Under such a structure, higher investment gains would pay more carried interest.

The third option, advertised by Bain as the ultimate alignment of interest with investors, will be based on a 0.5/30 fee structure with no preferred rate of return, the private equity firm told investors. That would provide even more carried interest should the fund be profitable.

Bain’s move to consider different fee structures comes as it tries to diversify its limited partners beyond endowments, foundations and wealthy families, which together constitute about 65 percent of its pool of investors. The firm hopes that giving investors options on fees will help it attract more pension funds and sovereign wealth funds, some of which are wary of overpaying for management fees.

The idea to experiment with the fee structure was inspired by Bain’s success in offering two fee options for its second Asian fund.

Bain offered investors the option of either a 2 percent management fee and a 20 percent carried interest with a 7 percent hurdle rate, or 1 percent management fee and 30 percent carried interest with a 10 percent hurdle rate.

Reporting by Greg Roumeliotis in New York; editing by Alwyn Scott, Maureen Bavdek, John Wallace

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