Bain eyes $6b-$8b fund, toys with fees

Bain Capital LLC is considering raising $6 billion to $8 billion for a new global buyout fund and offering investors up to three options on fees it charges to manage the money, according to two people with direct knowledge of the matter.

Bain’s last global fund, Fund X, launched in 2007, raised $10.7 billion and is about 70 per cent invested. Aiming for a smaller fund now reflects the post-financial crisis reality for private equity firms, which have seen both the universe of investors in buyout funds shrink and the existing investors cut back on their allocations to private equity.

In a bid to attract more investors in such an environment, Bain, which was once headed by Republican US presidential candidate Mitt Romney, is toying with the structure of fees it charges limited partners – pension funds, endowments, sovereign wealth funds and other investors in buyout funds, the sources said.

The firm is considering lowering the fee it charges to manage investor money while taking a bigger chunk of the profits from investments, also known as carried interest, betting that some investors would see that as better alignment of interests – Bain makes money when they make money.

Private equity firms have historically used the 2/20 fee structure, charging a two per cent fee to manage the assets and 20 per cent carried interest. The carried interest kicks in once the profits reach a certain rate of return, called the hurdle rate.

Seeking feedback from investors, Bain has discussed charging as little as 0.5 per cent in management fees and applying a hurdle return rate as low as zero for its 11th buyout fund, Fund XI, the sources said. Bain may still ask for a 30 per cent carried interest rate as it targets investors willing to pay more for incentive compensation in exchange for lower management fees.

The move to toy with the structure of fees, however, could create fresh headaches for Bain’s publicly traded rivals such as Blackstone Group LP and KKR & Co LP, which increasingly depend on management fees to pay dividends to shareholders.

Last year, Blackstone relied on fees for 82 per cent for its dividend payouts, KKR for 46 per cent and Apollo Global Management LLC for 25 per cent.

Bain’s move to consider different fee structures also comes as it tries to diversify the group of its limited partners beyond endowments, foundations and wealthy families, which together constitute about 65 per cent of its pool of investors.

The firm is hoping that giving investors options on fees would help it attract more pension funds and sovereign wealth funds, some of which are wary of overpaying for management fees.

The ideas to experiment with the fee structure were inspired by Bain’s success in offering two fees options for its second Asian fund.