Bain Capital Offers To Cut Size of Co-Invest Fund

Bain Capital is offering investors the chance to reduce their commitments to a $1.8 billion co-investment fund, peHUB has learned. Each limited partner would be allowed to cut back by up to 50%, assuming that a majority of investors ratify an amendment to the original fund documents (which they almost certainly will). LPs also would have the option to increase their commitments by acquiring someone else’s discarded position (which they almost certainly will not).

Bain closed the co-investment fund in late 2007, as a sidecar to what became an $11.5 billion general fund (Bain Capital Fund X). The idea was that it would be used for North American deals in which Bain’s equity check exceeded $650 million, with the general and co-invest funds to split the remainder 50/50. It also could theoretically be used for deals out of Bain’s European and Asian funds, although the initial waterfall for those vehicles flowed into Bain Capital Fund X.

Since the co-investment fund was raised, however, it has only been tapped twice: First for the $17.9 billion buyout of Clear Channel Communications in July 2008, and then for the $3.5 billion buyout of The Weather Channel in September 2008 (using a combined $100m from the co-invest fund). All of Bain’s subsequent deals have been too small to trigger to co-invest, including last week’s $418 million infusion into Chinese electrical appliance maker GOME.

Bain does not charge management fees on uncalled capital in the co-invest fund, but expect many limited partners to jump at the chance to dump part of an unfunded commitment. If each LP takes full advantage of the offer, it would reduce the co-investment fund’s size to just $900 million. Still sizable, but nowhere near the $5 billion Bain originally planned to raise (although, at the time, it had only been targeting $10b for the general fund, rather than $11.5b).

To be clear, I’m not saying Bain’s move is born of altruism. At the same time, however, I’m also not saying that it is being done to either curry favor with LPs or to guarantee commitments to a future fund (an argument many readers keep making to me, vis-à-vis fund size cuts in general). Instead, I’m saying that Bain has looked at current market conditions, and made both a logical and responsible decis