Bain Capital Funds… Itself

Bain Capital last week began raising its fourth “credit opportunities” fund for Sankaty Advisors, an affiliate that invests in leveraged loans, high-yield bonds, structured products and distressed debt and equity. Offering documents sent to limited partners did not include a target capitalization, but did reveal something far more interesting:

Last August, Bain invested $200 million from its ninth private equity fund into Sankaty Special Situations Fund, a vehicle specifically formed to acquire “hung” leveraged loans.

The move didn’t violate Bain IX partnership terms, but some LPs have complained that it was nonetheless improper to have done it without first soliciting advice or consent. Bain’s reply has been that its job is to make sound investments when and where it finds them. Last summer’s credit environment, it argues, was a dynamic situation that required decisive action.

“Bain obviously wasn’t alone in raising one of these hung loan funds, and their terms were no better or worse than most of the other ones,” says a limited partner in Bain IX. “But we still should have been asked about putting our equity commitments into a debt fund, because it puts us in the position of doubling down on existing bets.”

What the LP means is that Sankaty Special Situations Fund can purchase leveraged loans from existing Bain portfolio companies. The new Sankaty offering documents, for example, includes a graph detailing the particularly wide credit spreads of notes from Michael’s Stores, SunGard, HCA and (pending Bain portfolio company) Clear Channel.

It is unclear if any such deals have yet been done. Sankaty Special Situations Fund raised a total of $1.5 billion in equity – including Bain’s $200 million – and still has around $1 billion of that in dry powder.

That slow investment pace may be a silver lining for any disgruntled Bain IX LPs, given that last summer’s credit spreads now look rail-thin. As another LP said: “I’m not going to whine about it, because it might help the portfolio companies to have Bain holding some of their debt. In the end, our equity commitment is a far bigger figure than our pro rata share of the hung debt fund.”