Q&A: Bain Capital's Stephen Pagliuca

Q: At $17.8 billion, the Toshiba Memory Corporation deal is by some distance the largest PE buyout ever seen in Asia. Is it an outlier or a sign of the times?

A: There aren’t many of them, but the good news is when they come along we have the capital and global expertise to pull something like that off. You may not see 10-20 transactions like that, but Bain Capital can buy companies that are $15 billion, $20 billion or $30 billion in size, given demand for co-investment opportunities among our LPs.

Q: How did you leverage your global resources in this deal?

A: It is a global deal with several inherent complexities. We utilized people in each one of our offices. We have invested in two or three chip companies over the last 30 years, so we understood the cycles, we understood fabs, we understood the capital it takes and how people value those companies. We felt that Toshiba had a leading edge technology – flash drives – and it is one of only two companies that can produce them at scale. We don’t see demand abating for 20 years or more given the voracious need globally for storage in cell phones and computers.

Q: Are most of Bain Capital’s deals now global in nature?

A: Most of our deals are becoming global deals whether they are originated in the US or Asia or Europe. In the last 20 years, there has been an explosion in global trade and that has caused companies by definition to become more globalized. The Bain Capital of today and of the future must be an organization that can help build companies to global scale because that’s where the growth is going to be.

Q: Is Bain Capital now where you want it to be?

A: We are always striving to improve our model. We started out as generalist experts in consulting and business techniques to help grow companies. Many people copied that, and it was good for the industry because it helped other private equity firms transform other companies. To stay ahead of that game, we had to dig down further and establish global sector expertise. We are now layering functional expertise – such as digital marketing, financing, human resources – on top of that. Part of the evolution process is developing more functional expertise so that you can rapidly transform companies. The private equity firms of the future will be the ones with the ability to do that, and integrated on a global scale.

Q: What is the most challenging aspect of building that kind of firm?

A: Putting in place the culture – and I don’t know if you could create it from scratch today. When Bain & Company was founded in the late 1970s the whole ethos was to have people work together to transform and grow businesses and accomplish that goal on a cooperative basis. Bain Capital started out to be highly aligned with investors and uses similar skills to achieve that. Our systems have evolved from this culture. We are a globally integrated firm that promoted people based on adding value wherever they can and doing it in a cooperative way. We have the skills, culture, and compensation systems aligned with that, and investors aligned with that as well.

Q: What do these changes in the industry mean for the global firms?

A: There is a division between firms that are focused on capital gains and investment returns and firms – mainly those that have gone public – that have a dual goal of focusing on capital gains and investment returns as well as fee generation and assets under management (AUM). We are trying to generate capital gains and investment returns. Our whole system is based on investing our money and our LPs’ money in a way that delivers capital appreciation over a long period of time. Our fees are reinvested in building these vertical groups and expertise.

Q: You would never consider listing?

A: We would only list if we felt like it gave our investors and ourselves a strategic advantage with a view to investing in a better and more productive way. There are some benefits in terms of branding and maybe having additional resources to do acquisitions, but we’ve grown resources internally and can finance things from our balance sheet. We do everything with our investors. Our partners have made a large portion of their income by investing heavily in our funds and being aligned keeps us out of trouble. When you are putting your own money in, you think a lot about the upside and downside of deals. I think our strategy will stand the test of time, but we must be of scale to compete with the other global firms. If they start to pull ahead and we feel that we are at a competitive disadvantage in terms of the ability to hire people and be a global organization, then we might have to look at going public or getting more assets or changing our strategy. But so far, we have not been hampered by having less AUM than them. We have the scale and expertise to drive higher returns.

Q: What impact does this have on deciding whether to add new strategies?

A: We will continue to expand our asset classes, but the fundamental principles remain the same: they must be synergistic to the base, they must involve working to be the best not the biggest, they must have a strategy that delivers top quartile returns. If you break down the core success of Bain Capital, it’s this fact-based analytic approach with state of the art techniques to transform businesses. That approach works in venture and it works in credit. The key is to roll out new strategies such that you are being accretive to your base businesses. We’ve done that internally while bringing in some specialists from the outside and it keeps our company strong and vibrant and it means we have the money to invest in improving those verticals. We are going down the experience curve in a systematic, thoughtful way.

Q: Are LPs asking you to diversify 

A: We try to dovetail with the interests of our LPs. Many of our investors wanted to put money against social responsibility and we had done some deals in our main fund that had a social responsibility aspect. For example, Toms gives away a pair of shoes for every pair purchased and Sundial sources products from Africa, which creates jobs. We were excited about the opportunity to work with Deval Patrick [a former civil rights lawyer who served as governor of Massachusetts from 2007 to 2015, succeeding Mitt Romney] and a group of our highly motivated team members already at Bain Capital to build the Double Impact fund to focus on socially responsible investments that would provide good returns to our LPs. The fund now has $390 million of capital to invest.

Q: To what extent are you concerned about the amount of capital available and its impact on valuations?

A: I first got this question in 1991. Then I got it in 1997, 2003, 2008, and now I’m getting it again. The world has changed. You didn’t have a world where the likes of Uber could be self-financed up to becoming a large company, or a world where a large private equity firm could buy a company from a mid-size private equity firm and take it public later. There has also been an evolution in the kinds of PE financings.

Q: How did you answer the question in 1997?

A: The answer in 1997 was very similar. We felt that our model would be successful in finding interesting companies where we could make a difference. We felt that there would be continued opportunity to invest in North America and also to expand into other geographies, bringing the model to Europe and Asia. Those same dynamics are in place today and I believe that there will be future growth available in our current geographies and longer term in South America and eventually in Africa. I have never been more excited about the prospects for the future and our capabilities to build and grow great companies on a global basis.

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• Topics
• North America
• GPs
• Bain Capital Asia
• Asia