Bain Capital is running out of money. Of course, that’s a bit like saying that an ATM machine is running out of money: Rest assured that someone will show up in the morning to fill ‘er back up.
The Boston-based firm had raised $10 billion this past spring, including an $8 billion general fund and a $2 billion co-investment vehicle. Its expectation was that the capital would last at least three years, in contrast to a $4.25 billion predecessor fund that was tapped out after just 21 months. As Bain CFO Mike Goss told Buyouts Magazine at the time: “We don’t raise funds with the intention of investing them in two years… [The previous fund] was undersized relative to our market power and opportunity. Now we have a fund that should last three to four years.”
Bain limited partners, however, tell me that the new vehicle was around 30% called-down through the end of September, on deals like Dunkin Donuts and Burlington Coat Factory. Since then, it has closed on both HCA (approx. $1.2 billion from Bain) and Michaels Stores (approx. $1 billion) – and is on the hook for both OSI Restaurants and Clear Channel.
In other words, well over half of the $10 billion is committed. At this pace, it should be out of dry powder by Q2 2007 (i.e., around 15 months since holding a final close).
So now what?
Sources say that Bain has little appetite for raising another fund so close on the heels of its last one, nor is it interested in some sort of public flotation like the KKR Euronext offering. Instead, it has discussed more conventional options, which could include some sort of profit reinvestment.
I’ve also been told that a Blackstone-like fund expansion could be on the table (with existing and/or new LPs), although one knowledgeable source insists that such a strategy has been ruled out. The firm, through a spokesman, declined to comment.
Some Bain critics suggest that this capital crunch is the inevitable end result of a firm that rarely sees a deal it doesn’t like. And there some truth to that line.
But the real moral of this story is that no firm reasonably could have been expected to have correctly forecast the exponential upswing of LBO volume over the past two years. Almost every single mega-firm has been forced to revise its latest fundraising target (Blackstone, KKR, TH Lee, etc.), and they probably still are raising too little money.
Some political partisans have suggested that the recent rash of deals has been prompted by fears of an incoming Democratic Congress, but I think it’s being propelled by its own momentum. Each time one board votes in favor of a 20% premium, it births another two boards in search of their own payday.
There will be an end, of course, but that will have to wait until a few big-name companies collapse under their own debt, are unable to exit at premium-on-premium or the longer-shot of a DoJ criminal investigation. Until then, expect LPs to just keep letting it ride.