AVCJ Awards 2023: Firm of the Year – Large Cap: Bain Capital

The firm invested USD 4.2bn and realised USD 3.7bn across Japan, China, India, and Australia, punctuated by a bumper buyout of Proterial (which won the Deal of the Year – Large Cap prize) and a string of strong exits
 
The JPY 817bn (USD 7.5bn) acquisition of metal products supplier Proterial, the second-largest private equity buyout completed in Japan, looms over Bain Capital’s activities of the past 12 months. Exits are another significant part of the story, however, in terms of capital distributed and broader insights into how managers are thinking about distributions.
 
Bain’s exits for the year through September 2023 amounted to USD 3.7bn. They included a full exit from marine logistics business JM Baxi and a partial exit from digital consulting player Brillio, both in India and both to strategic investors; the sale of Australia-based Retail Zoo to another GP; and a deal that saw half of Japan’s Works Human Intelligence (WHI) sold to GIC and the other half go to a later Bain fund.
 
This momentum continued in the subsequent months, notably in Japan where Bain secured robust exits from care services provider Nichii Gakkan and renewables specialist Japan Wind Energy. They followed the private equity firm reaching a relatively swift final close on its fifth pan-Asian fund, the USD 7.1bn total comfortably surpassing an initial target of USD 5bn.
 
“The most important thing is you improve the business. If you have a good business, you create many possibilities,” said Yuji Sugimoto, a Tokyo-based partner at Bain.
 
In the case of human resources software specialist WHI, the private equity firm’s first instinct was an outright sale. It had acquired WHI nearly three years earlier for about JPY 100bn and executed an expansion plan based on M&A and a transition to cloud-based enterprise resource planning (ERP) products. Prospective buyers were willing to come in at a JPY 350bn valuation.
 
GIC put in an attractive offer, but it preferred a partnership with Bain to a full acquisition. Financing also came into consideration as a point of competitive advantage for the private equity firm. “A select number of local banks are eager to work with us because they know what we can do,” said Jonathan Zhu, a partner and co-head of Asia private equity at Bain.
 
At the same time, there was a sense that, having been presented with the opportunity to maintain exposure to a prize asset – WHI is the runaway market leader in its segment – Bain should take it. This led to the firm’s fifth Asian fund joining GIC in taking out positions held by Funds III and IV.
 
WHI represents the firm’s second cross-fund deal in Japan; the first was Japan Wind, where Fund IV took out Fund II a couple of years before the final exit. Bain declined to comment on the likelihood of more cross-fund or continuation-fund transactions in Asia, though it has raised continuation vehicles in the US and Europe.
 
With WHI, Bain effectively extended its journey but retained the liquidity event. India-based Brillio played out against a different backdrop. A portfolio company since 2018, it was slated for an IPO but with US markets largely inaccessible, Bain opted for a partial exit. The Orogen Group, an investment firm led by former Citi CEO Vikram Pandit that had been tracking Brillio for some time, acquired a minority stake.
 
“When the macro environments are tougher and liquidity is harder to come by, if an asset is doing well and liquidity is available at a fair price, it’s wise to capitalize on it,” said Pawan Singh, an India-based partner at Bain.
 
JM Baxi represented a faster turnaround – the private equity firm was in and out within two years – but positioning the business in a way that generated strategic interest once again paid off. The company operates ports under long-term government concessions, which made it a good fit for Hapan-Lloyd, a German container transportation giant that was looking to replicate its South America expansion in Asia.
 
Bain helped JM Baxi grow port capacity by 170%, transforming the company from a strong local player into an emerging national player. Moreover, it introduced an environment, social, and governance (ESG) strategy, a carbon neutral plan, and ambitious emissions reduction targets, implicitly making the business more attractive to multinational buyers, especially those out of Europe.
 
“They view India as a long-term growth market and now have a local port partner,” Singh said of the strategic relevance of JM Baxi to Hapan-Lloyd. “They will have access to those ports, which becomes invaluable if capacity constraints arise. And at the same time, they benefit from the natural synergies of being able to increase business for the ports in their network.”
 
Landing whales
 
It’s worth noting that the JM Baxi holding period began one month before Bain announced the acquisition of Proterial (formerly Hitachi Metals) and concluded about three months after the Japanese deal closed. The transaction – completed in October 2022 via a tender offer that took out parent company Hitachi’s controlling stake – was delayed by the need for signoffs by anti-monopoly authorities.
 
Addressing Chinese concerns was the key issue. Proterial is a dominant force in NdFeB magnets, or rare earths magnets, which feature in the likes of mobile phones, electric vehicles, and wind turbines. It owns most of the patents required to manufacture these magnets; China is the world’s leading producer.
 
Bain has been here before. The GP led a consortium that acquired Toshiba’s flash memory division – now known as Kioxia – through a JPY 2trn deal in 2017, but it had to wait nearly a year for China to complete its anti-monopoly review. One difference between the two transactions is how China-US relations have soured in the interim. Anything that sits near semiconductors might become contentious.
 
“We navigate through these challenges diligently. We are very considerate of geopolitics and national security concerns during deals,” Sugimoto explained. When asked if antitrust issues could potentially derail a transaction, he added: “If we must spend a lot of time and money on a deal and the possibility of closing is low, then maybe we have to be more careful with our resources.”
 
Targeting Kioxia and Proterial necessitated the formation of consortia, given the size of the assets. The Kioxia group had an international flavour, including the likes of Apple, Seagate, and SK Hynix. For Proterial, Bain sought out local PE partners: Japan Industrial Partners and Japan Industrial Solutions.
 
“Kioxia was almost twice the size of Proterial, and we needed strategic support that was interested in semiconductors. With Proterial, we needed a Japanese partner. The company has factories all over Japan – for example, it is the largest employer in Tottori Prefecture in western Japan – so we must talk to state and local governments,” said Sugimoto. “It’s about being a trusted partner.”
 
For corporate divestments, there is to some extent a standardised playbook. Proterial has a sprawling network of businesses, so Bain’s to-do list included deciding what was core and non-core. It also strengthened corporate functions, bringing in senior-level expertise and establishing new IT and financial systems, so the company could track its progress and adjust course in response to market conditions.
 
With size comes greater complexity, but sometimes it is more nuanced than that. While Proterial and Kioxia are broadly comparable in terms of revenue and similarly global, Proterial has half a dozen different product lines to Kioxia’s one. Then there’s Evident, a medical devices business carved out from Olympus in early 2023; its relatively modest size – JPY 428bn – belies a challenging value-add process.
 
“It specialises in microscopes and medical testing equipment, but there are several product lines and operations all over the world, including a couple of companies in the US and Canada that were acquired,” said Sugimoto.
 
Japan became Asia’s leading recipient of private equity capital last year, largely on the back of a string of large-cap buyouts. Sugimoto believes there is more to come, citing mounting pressure on corporates to improve performance by selling off non-core assets. Pressure is being applied by increasingly aggressive activist shareholders and regulations encouraging companies that trade weakly to consider delisting.
 
China in transition
 
Japan and China were the focus of Bain’s first two Asian funds, with India, Australia, and Korea featuring from Fund III onwards. These remain the firm’s core geographies, but deployment levels in each one shift from cycle to cycle.
 
The firm now has 200 investment professionals in the region – across its private equity and special situations strategies – working out of 10 offices. Most recent hires have been in Japan. In Fund I, the Japan and China PE teams were about equal in size. Today, there are twice as many people covering Japan as China. There is also a dedicated Japan middle-market fund of JPY 110bn.
 
Zhu admitted that, of Bain’s big three markets, Japan and India are more active than China. Nevertheless, valuation drop-offs and reduced competition as sponsors conserve their capital are encouraging. Zhu estimates that 50% of China’s economy is investable – smaller than a few years ago, largely due to regulation and geopolitical tensions, but still bigger than India and Japan combined.
 
”When evaluating deals in China we have different screens: a business and economic screen, a regulatory screen, and a geopolitical screen,” he explained. “The challenge is that due to these complexities, coupled with the slow recovery from COVID and companies underperforming, sellers are not motivated to exit.”
 
Bain’s largest recent China transaction is the USD 3.1bn take-private of hyperscale data centre operator Chindata, which was agreed in August 2023 and closed four months later. Bain created the company by combining Bridge Data Centres, which aspired to grow in India and Southeast Asia , and the data centre division of China’s NetScience Technology.
 
Starting with an asset base that was 65% China and 35% India and Southeast Asia, the goal was to create a geographically diversified regional platform. However, by the time Chindata listed on NASDAQ in October 2020, about 90% of the operating capacity was in China. Over time, China more than doubled in capacity and Southeast Asia is now catching up,” Zhu observed.
 
ByteDance is Chindata’s single largest customer in China, so growth is linked to the popularity of Toutiao and Douyin. A China-skewed asset base is unlikely to have helped the company as a listed entity in the US. When Bain proposed a privatisation, Chindata was trading at a near 60% discount to its IPO price and liquidity was limited.
 
Other China investments include EcoCeres, which claims to be one of few companies globally to have commercialised a sustainable aviation fuel (SAF) product based on agricultural waste. Bain reportedly paid USD 400m for a 43% stake in January 2023 with Hong Kong utility Towngas also taking 43%. EcoCeres used to source inputs from China and sell SAF into Europe. Bain is supporting global expansion.
 
The company is part of a broader energy transition thesis that interests Zhu greatly. The first deal he pitched on joining Bain in 2006 was a solar panel maker. It didn’t go through, partly because solar panel economics were skewed towards silicon suppliers. Now, the opportunity set is broader, encompassing value chains built around everything from mobility to renewables to energy storage.
 
“Energy storage is an interesting sector within the Chinese economy,” Zhu observed. “The market is huge. China’s share of renewable energy in overall power generation is one of the largest globally. However, renewables are intermittent and lack a baseload for generation. China needs to make the grid work, creating opportunities in the equipment used to construct and strengthen the grid.”
 
Control scenarios
 
In India, Bain’s recent investment activity reflects a longstanding interest in IT and business services outsourcing. In October 2022, the local team closed its fourth deal in the space by picking up a stake in CitiusTech, a healthcare specialist backed by EQT Private Capital Asia. Singh noted that IT services is “in an air pocket” created by the post-COVID digital hangover, but he believes in the long-term growth story.
 
“There is a lot of depth in the market. It’s surprising how often a compelling middle-market services company pops up. Part of it is that these companies grow quickly,” he said. “At the same time, a handful of investors have more experience in the space, better connectivity, a better playbook, and more conviction in some of the themes. We think we are one of those firms.”
 
CitiusTech is a classic US front office-India back office play that relies on the continued penetration of digital services in healthcare in the US. Its investment history – a minority stake for General Atlantic, a majority stake for EQT, joint control for Bain and EQT – also points to an emerging buyout opportunity.
 
Singh identifies founder-entrepreneurs reaching an age where they want liquidity and venture capital-backed companies graduating to private equity as contributing factors. Yet he stresses that the trend is not restricted to IT services. “Ten years ago, only 10%-15% of the capital invested in India by our peer set was deployed in control deals. Today, we estimate that it’s above 60%,” he said.
 
Two Bain investments from the summer of 2023, neither in IT services, stand as cases in point. The PE firm picked up Porus Labs, a manufacturer of agricultural and speciality chemicals, and followed up with the acquisition of non-banking financial companies (NBFCs) Adani Capital and Adani Housing.
 
While Porus fits the classic founder-selling-out profile, the Adani transactions coincided with turbulence at the parent level as Adani Group sold off non-core assets to create a liquidity buffer following a short-seller attack. Adani Capital’s CEO, who set up the business with backing from Adani Group, was familiar with the Bain team and reached out to suggest that a deal might be possible.
 
“A banker was indeed hired, but it was somewhat of a limited process. Truly bilateral control deals, without the involvement of other parties, are rarer. Often, the scenario falls somewhere in between, where two or three parties, well-acquainted with the company and its trajectory, are extended invitations,” said Singh.
 
Regardless of geography or sourcing channel, Bain is underwriting investments carefully, conscious that the low-interest-rate environment responsible for turbocharging private equity globally has passed. The firm is keen to highlight its sector and operational capabilities.
 
Zhu describes Bain’s set-up as a matrix comprising five broad sector groups – consumer, financial and business services, healthcare, industrials, and technology – that operate at different geographical levels. For example, when the Asia team assessed EcoCeres, it had no prior biofuels experience to fall back on. Colleagues in Europe helped fashion the investment thesis and source additions to management.
“You can generate returns from beta and alpha. A strong macro backdrop gives you beta and the entire industry has benefited from it,” he added. “We have always focused on generating alpha: through multiple geographic expansions, driving scale leverage, and operational improvement. In the current environment, a very high premium is attached to operational improvement.”