Even megafunds need to meet LP demands

Bain Capital is eyeing a multi-billion-dollar target for its second Asia-focused fund, and is considering a new range of options for its LP investors in a strategy that, if successful, could be used as the template for its future megafunds. The question is will other global brand names follow suit.

Sources familiar with the vehicle tell AVCJ that fundraising for Bain Asia Fund II LP will officially begin in the coming months. While a decisive target has not been agreed, the corpus for the fund looks to be in the $2 billion range, or twice the size of its previous Asian vehicle raised in 2007. Fund I is approximately 60% committed, and has made either growth or buyout investments in eight companies in China and Japan. These markets will remain a focus for Bain Asia Fund II, as will India, exposing investors to a new set of opportunities in the region, sources said.

Changing tide for fee structures

At a time when Baring, KKR and 3i are all in the process of raising or closing their own billion-plus funds, Bain Capital is said to be "seriously considering" offering a revised model for investors with respect to management fees and carry. While sources said that the specifics of the fund will not be decided for at least another month, Bain is considering allowing investors to pay lower management fees - 1% instead of the standard 2% - with Bain taking a 30% carried interest. LPs can also opt for the 2% and 20% model, which is still lower than Bain's historical 2% fee and 30% carry, implemented in its first Asia fund.

With competition on the rise for Asian dollars, sources told AVCJ that Bain would like to see existing and previous LPs (predominantly Western) commit to the new fund. Those who are comfortable with Bain's previous investment structure will hopefully see the move as a positive one, while Bain is now also able to appeal to LPs seeking performance-led fee structures. Pending the success of the new offering, Bain may incorporate it into all future funds.

The give on fees and carry is a direct result of the more arduous fundraising climate and increasing demands from LPs to see GPs incentivized to make profits, not profit from management fees. AVCJ understands that, if Bain were planning to raise a European or global fund in 2011, these funds could also be test cases for the tiered fee model. For such funds, sources suggest that nothing will be decided until 2012 or later, when the next vehicles are raised.

Since the global financial crisis, LPs have found their voices with respect to contractual demands, asking that funds be more reasonable with fees - particularly for megafunds - and to make changes to their payment, carry and fee structures that show true alignment with investors. Robert Televski of Telstra Super recently said at the AVCJ Forum in Australia, "We would like to see lower fees, and we would like to see GPs investing in their own funds." For Bain's part, it is at least halfway there.

Investing remains the same

As regards Bain Asia Fund II's investment thesis, this is set to remain intact. Buyout opportunities will still likely fall in the $400-$500 million range, while growth will remain roughly a tenth of that. The larger Fund II will enable more investments, and will now fund Indian deals, which have been traditionally financed by global funds.

An active investor across Asia, Bain will still rely on its global parent to provide investment support. The firm currently tells LPs that the first 8.5% of any equity check comes out of Asia Fund I, while the remaining capital is contributed from its $10 billion global Bain Capital X LP fund. The logic is that it avoids overconcentration to any one investment, and gives further regional diversification to Bain's global LPs. Given that Asia Fund I has a $1 billion corpus, that equates to an $85 million threshold per deal. As Fund II will be twice the size, that bar may rise by as much as double, or to $170 million.

Bain Capital Asia claims 63 staff across offices in Hong Kong, Shanghai, Tokyo and Mumbai, the latter of which opened three years ago and has 16 professionals. Outside of the eight investments made by Fund I, Bain's global funds have invested in companies including the firm's three investments in India: Himadri, a distiller of coal tar, in 2010; Lilliput Kidswear, also in 2010; and most recently Hero Honda, which Bain, with GIC, invested an undisclosed amount into last week to enable India's Hero Group to acquire Honda's 26% stake in their JV.

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• Topics
• North Asia
• South Asia
• GPs
• LPs
• Fundraising
• Bain Capital Asia