Q&A: Bain Capital's Steven Barnes

Q: Earlier this year the firm underwent a rebranding exercise, with the credit and public equities divisions both taking on the Bain Capital name. What was the thinking behind these changes?

A: We decided to do to ourselves what we do to our portfolio companies - take a step back, analyze a lot of data, look at what has worked well for us, and consider what we could do even better. The core strengths of the firm are unique and insightful diligence, having operating capabilities and being able to drive change, and we wanted to build on those. The rebranding was part of this approach. It was a values-based exercise and it is all about the way we view ourselves, operating more as one firm, and rallying around the values that define us.

Q: Rising valuations are a dominant theme in North American buyouts. What are the market dynamics?

A: There is a bit of a disconnect in that the valuations for companies with good track records and management teams, and could feasibly go public, are considered low risk assets and therefore command a significant premium. However, we consider these assets to be risky because you have to pay such a high multiple for them. We are spending a lot more time really focusing our sourcing in two areas: places where we have real insight and places where we can drive transformation. The relative values for these are more reasonable on a price-for-growth basis.

Q: How does the situation compare to the run-up to the global financial crisis?

A: For high quality assets, prices are high and debt is relatively high, so there might be more asymmetrical downside than upside. But there is more prudence now than then. There is also a similar feel and prices are similarly high, but people are more thoughtful about the companies they are buying and the types of financing they are getting -they know that if things don't go well they will have some flexibility.

Q: There is also a lot of strategic interest in M&A. What is driving this?

A: A lot of it is coming from the fundamental issue that we are in a low growth environment. Strategic players have spent a lot of time optimizing their own companies and taking out cost, but the market is looking for growth, so these companies are looking to develop more diversified portfolios. They've got a lot of cash, so you've seen them use stock buybacks to drive earnings, but that can only go so far. There is more competition from the strategics, but they also represent a great exit option for us. We see more and more sales to strategics and I think that is likely to continue for quite a while.

Q: How would foreign interest be impacted if the Trump administration takes a more nationalistic policy approach?

A: It's hard to speculate on that point. What I would say is that uncertainty is a good thing in many ways because it creates disruption. We are growing our companies' bottom line by 15% while economies are growing 2-3%. That means dislocation is creating winners and losers. We look at 100 companies for every one we pursue with any real interest, where there is certainty as to what needs to happen. But uncertainty leads to misunderstanding. While nine out of 10 companies might deserve lower valuations, one in 100 should not have seen their valuations drop. In this low growth environment, change and disruption is a way for private equity to get the kinds of returns we are targeting.

Q: Bain has institutionalized its approach in part by moving from a generic sector focus to targeting specific verticals. What is the next step?

A: We are continuing to enhance our model. The most important point is the need to have firms achieve high performance. It's really about having a culture that has the confidence to look at things and constantly find ways to improve. Without question, we need to continue to leverage our vertical expertise and the ability to go to greater depth. For example, if a company comes up for sale, you're flat-footed and it's a six-week process, then you're done. You will be competing against someone with a team that has been working on that theme for two or three years, has looked at seven or eight other companies, and has multiple executives lined up.

Q: Given the resource requirements that come with that approach, how much harder does it come for a firm to become a truly global player? Or will we see more global sector-focused players?

A: There are several advantages to scale - and the resources it takes to operate globally are significant - but firms can also find ways to do this in their own way. As for sector-focused firms, there might be deep expertise but they live or die by that sector. One of the things I am seeing in our business is how important it is to get verticals working together. The simplest way to explain this is technology - I could look at 80% of our deals and say they have some technology component. So there are more situations in which our deep technology team contributes to a consumer sector deal, and it's a powerful combination. The consumer team might also work with the industrial team because understanding the consumer piece of what is happening to an industrial product is real insight. It comes back to having unique insight and the ability to drive operational change.

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• Topics
• North America
• Buyout
• Buyouts
• Bain Capital Asia
• USA