
Asia Awards: Firm of the Year – Bain Capital
In the past 12 months, Bain Capital has raised its second Asia fund, closed sizeable deals in Japan and India, and completed a strong China exit. Jonathan Zhu, a managing director at the PE firm, looks back and forward
Q: Bain closed its second Asia fund at $2.3 billion this year. How did the process differ from the $1 billion debut regional fund?
A: Fund I reached a final close in February 2007, about 5-6 months after it was announced. The fundraising wasn't really "public" because we offered LPs in Bain Capital Fund IX a pro rata opportunity to invest. Almost all the global fund LPs subscribed to the first Asian fund. We were nearly four times oversubscribed and had to cut people back substantially. The diligence consisted of a few of us spending a week to 10 days in Boston waiting for people to come in if they were interested. This time around it was very different. The fund is larger and we have a lot of new investors. We had to do pretty extensive marketing and the whole process took about one year. The target was $2 billion, with Bain employees putting in $300 million on top of that.
Q: What are your expectations in terms of deployment?
A: We would like to deploy in four years and so far we have deployed about 20%, so we are right on pace. There have been three investments - Jupiter Shop Channel [$1.1 billion], Genpact [$1 billion] and a committed but unfunded investment in VXI, a Chinese call center operator. VXI is a smaller investment - $120 million, with $80 million in equity. Fund I took a bit longer to deploy than anticipated, primarily because of the global financial crisis. There was a 12-month period where we made no investments. In terms of total capital deployed, it was way above the limit because we have a co-investment arrangement with our sister global fund. For example, at $3.2 billion, with $1.25 billion of equity, Skylark was a very big deal and individual transactions in Fund I were capped at $85 million. As a result, all the rest went to the global fund and co-investors.The transaction size is unlikely to vary that much for Fund II, but there will be less co-investment by the global fund because the Asia vehicle is larger than before.
Q: Fund I focused on North Asia - China and Japan - but Fund II covers the entire Asia-Pacific region. What kind of deal flow is likely to come from Southeast Asia?
A: We don't think we will be doing a lot of deals in Southeast Asia. The aim is to have a truly regional platform where every market is a potential target but no market is a must-have. We always look for larger deals - due to our size and in order to be differentiated, because larger firms tend to be more complicated and harder to understand from a diligence perspective. We also have a large operating team that we send to each company to help management grow the business. That works better with larger companies.
Q: How many people are there in the operating and investment teams?
A: The operating group has 17 people, and then we have just under 60 investment professionals. When we raised the first Asia fund we had 28 people in total.
Q: Are you likely to open more offices in the region to reflect the broader geographical mandate?
A: These moves are challenging: you have the conflicting desires to be local and on the ground and also to be centralized and have a cohesive team that works together. Having teams in the three core countries - China, Japan, India - is very important. We will continue to explore the other markets, and my guess is we would probably open the next office in Southeast Asia, but there are currently no plans to do this.
Q: What changes have you seen in the China investment environment?
A: Over the last several years a couple of things have changed. Our first deals in China were $30-40 million, but now we typically invest $70-80 million as a minimum. The level of control and influence has also changed. When we raised the first Asia fund our expectation was that control isn't available in China, but we were surprised on the upside. China Fire & Security was a take-private and a control transaction; Uniview Technology was a corporate carve-out of Hewlett-Packard's China-based surveillance security business. This year we looked at 4-5 transactions where the corporate is looking to sell 100% of the business, so take-privates aren't the only type of control opportunity. Most of the take-privates we have seen so far resulted in the management team or founder retaining control with the private equity investor becoming a substantial minority shareholder.
Q: Bain exited Hipro Polymers and Casda Biomaterials to Arkema, a strategic buyer. Is this the new normal for China exits?
A: It's going to be part of the norm. Twenty years ago there was probably nothing to buy in China for these multinational strategic investors; most foreign direct investments were on a greenfield basis. In the last 10 years you have seen some Chinese businesses, manufacturing or otherwise, achieve scale, develop good management systems and good facilities, and strategic investors are interested in buying them. With Hipro and Casda, we originally bought a minority stake in Feixiang Chemicals in 2007. Feixiang decided to go into a new business, creating HiPro, and then Casda was an acquisition. We had two thirds of these businesses and the founders retained one third. Feixiang was sold to another strategic investor in 2010 and then we exited the two remaining businesses last year. In total, we returned 4x our cost.
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