AVCJ Awards 2018: Firm of the Year - Large Cap: Bain Capital

Toshiba Memory Corporation (TMC) commands attention in private equity circles. Last year, the company was at the center of a competitive process that resulted in the largest-ever buyout in Asia by a financial sponsor-led consortium. It was played out in the public eye and required striking a careful balance between commercial necessities, regulatory concerns, and national interests. Even after a definitive agreement was signed for a JPY2 trillion ($18 billion) deal, a string of legal issues involving Western Digital – TMC’s joint venture partner and would-be acquirer – had to be resolved. 

Bain Capital was the architect of the deal, negotiating an eight-month bidding war followed by a protracted period spent resolving legal disputes and securing regulatory approvals, before reaching the finish line in June. However, this transaction threatens to overshadow the private equity firm’s other activities from the last 12 months, including a stellar exit in Korea and several challenging China-related investments. If there is one unifying factor, it is cross-border complexity.

“The cross-border theme is certainly becoming more pronounced in Bain Capital’s investment strategy and it plays to our strengths. We are using vertical sector knowledge and experience to find deals that are a strategic fit for Bain Capital despite an uncertain market environment and generally high valuations,” says Jonathan Zhu, the firm’s co-head of Asia. “Often, we see opportunities to create value that others might not, simply because of our cross-border experience and deep sector knowledge, not to mention years of proprietary relationship building. In other words, our own capabilities drive our deal flow.” 

Korea plus 

Zhu points to cosmetics business Carver Korea as an example. Bain and Goldman Sachs acquired a majority stake in the founder-owned company in 2016 for approximately $370 million. Fourteen months later, the business was sold to Unilever at an enterprise valuation of $2.7 billion. In addition to professionalizing the brand and reinvigorating the product line, the investors helped Carver establish a local presence in China. 

From Bain’s perspective, it was never just an investment in a Korean cosmetics business. The China expansion angle was evident from the outset – even before the 100-day plan was drawn up – and the challenge was finding a way to make it work. Carver recognized the strength of Korean cultural exports in China and it was already generating revenue in the country, but there was limited visibility as to where it was coming from.

“While they had high-quality products, they needed help on licensing and branding. They knew the Chinese were buying their products and were purchasing through e-commerce channels but did not know who was buying or selling or how the products were getting into China,” says Zhu. “Licensing the products for expansion to China was in our strategy from the very beginning.”

Bain instigated the hiring of a chief marketing officer who was responsible for changing the brand design, collaborating with external vendors on product launch campaigns, and building a Chinese website. Brand awareness among the target customer base rose from 30% to 70%. The private equity firm also helped Carver apply for regulatory approval for its products, build a local team, and establish a presence on e-commerce platforms.

A global effort

The Carver value creation story was driven by Bain’s resources in China and Korea. For TMC, the effort drew on a wider array of internal inputs, as befitting a transaction of that size and with interested parties spread across multiple geographies. About 20 Bain executives across Japan, Korea, China, and North America played some role in the process.

“In order to earn the trust of the government, the company and financial institutions, we needed a great track record, strong presence and long-term commitment to Japan. We worked to bring together seven different strategic parties to enable the transaction. We also had to work with the Tokyo Stock Exchange, Western Digital, SK Hynix, TMC customers such as Apple, Seagate and Dell, and the government and the semiconductor industry in China,” says David Gross-Loh, who serves alongside Zhu as the firm’s Asia head.

He ranks TMC as one of the largest and most complex that Bain has completed globally. In addition to the difficulties of managing different stakeholders, including multiple governments, the scale of the transaction, and the carve-out nature of the business, financing presented a challenge. TMC is a large player in a highly cyclical, capital-intensive industry and more than $6 billion in capital expenditure was budgeted over 2-3 years. A highly levered capital structure was not feasible, so Bain had to raise a significant amount of capital.

While Bain has teams based in different markets, the firm doesn’t seek to define itself by geography, and leaning heavily on global sector expertise is helpful in this respect. Zhu contends that you could ask any partner in the firm’s private equity division about deals outside of their home market and they would deliver a knowledgeable response. In many cases, this comes from direct involvement in the investments.

As such, Bain’s approach to cross-border transactions in Asia hasn’t necessarily evolved by design, but it benefits from the general accumulation of experience and talent over 15 years in the region. “We have highly localized teams who are able to leverage long-term relationships to deepen our sourcing funnel and secure proprietary angles on most deals,” says Gross-Loh. This is complemented by the addition of more specialist capabilities to portfolio teams, for example in marketing and human resources.

An unavoidable angle

The firm now has approximately 80 people across eight offices in Asia. These resources do not necessarily lead to more deals of a certain nature, but they increase the chances of an opportunity being pursued in part based on a cross-border strategy. “We never focus entirely on the country macro factors but look for micro themes and an ability to transform a business with an intensive, hands-on approach,” says Zhu. “We also actively seek out deals and combinations that have the potential to offer a cross-border advantage or a global vertical advantage.”

Towards the end of last year, Bain acquired Trans Maldivian Airways (TMA), the world’s largest seaplane operator, in conjunction with Shenzhen Tempus Global Business Services, a Shenzhen-listed provider of air tickets, tourism, travel management, and online travel finance services. The choice of partner was driven by an awareness of the impact of increasing Chinese visitor numbers to the Maldives. The deal also includes a structural feature that gives Bain the option to sell its stake to Tempus, ensuring an element of downside protection.

Several months later, the private equity firm acquired World Wide Packaging (WPP), a US-based provider of cosmetic packaging components. It concurrently purchased a minority stake in Gerpman, a fast-growing Chinese company with a similar industry focus. Bain has since merged the two, forming an integrated cosmetic packaging solutions business. The deal essentially gives WWP a leg up in a beauty products market where demand is growing three times as fast as in the US.

Neither TMA nor WPP would have been acquired without the China expansion angle. These investments – as well as Carver Korea – underline how private equity activity in Asia is becoming increasingly multi-jurisdiction for firms that are willing and able to think in those terms. China is inevitably the common touchpoint for such deals.

“China is the largest economy in the Asia Pacific region and the Chinese economy alone is larger than the rest of the region combined,” says Zhu. “China’s important place in the global value chain and the emergence of a growing consumer class in the country means that China is often, if not always, relevant in our investments.    

A year in the life of… Bain Capital

Having led a consortium that bought Toshiba Memory Corporation for JPY2 trillion ($18 billion) and completed a successful tender offer for advertising agency Asatsu-DK despite opposition from the largest shareholder, Bain Capital Private has seen its fair share of complexity in the last 12 months. However, such creatively structured cross-border transactions are not limited to Japan. The GP also acquired US-based World Wide Packaging and merged it with a Chinese peer and then brought a Chinese strategic player into the buyout of Trans Maldivian Airways. Moreover, there was evidence of a cross-border deal paying off as Carver Korea – a cosmetics company with international ambitions – was sold to Unilever for a substantial return.

Pictured: Jonathan Zhu (left) and David Gross-Loh (right) of Bain Capital receive the Firm of the Year - Large Cap award from Baker McKenzie's Dorothea Koo

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• Topics
• North Asia
• Greater China
• Buyouts
• Trade sale
• China
• Japan
• South Korea
• Bain Capital Asia
• AVCJ Awards