By Dan Primack
March 12, 2011

The NY Post today wrote that Bain Capital stands to book a “significantly larger” profit on the HCA (HCA) IPO than do Bain’s own investors:

Bain Capital put down about $64 million, or 6 percent of the money in its buyout fund that invested in hospital chain HCA in 2006. After five years, through yesterday’s IPO, Bain had collected roughly $750 million from HCA, including fees and commissions — for a whopping cash return of more than 10 times its investment.

Investors in the Bain fund had $956 million of their cash put in the deal. Through the IPO, they had received back about $1 billion — for a slim 4 percent cash return.

That means for putting down 6 percent of the money the firm invested in the HCA deal, Bain principals have received 42 percent of the total haul.Bain’s $750 million payday includes a $460 million, or 30 percent commission, or carry, from buying and selling the company, a $62 million management fee charged to HCA, a $58 million transaction fee and a $76 million management fee charged to its investors.

Ouch. That sounds pretty inequitable. Maybe we should revisit some of the Post’s assumptions:

1. Bain has “collected roughly $750 million.” No, it hasn’t. For example, the firm has not yet seen a dime of that $460 million carried interest slug. Carried interest only gets paid once the entire fund is in the black (plus 10%), as opposed to a single portfolio company. As of today, the fund out of which Bain did HCA is not “in the carry.”

2. Also, the carried interest calculation itself is flawed. The $460 million is based on a 30% carried interest, which is what Bain charges investors on its ninth fund. Except that only 67% of Bain’s investment came from that fund. The rest came from a co-investment fund that charges a 20% carried interest.

More importantly, the $460 million figure comes from adding HCA shares sold in the IPO to shares that have not yet been sold. Not only can we not adequately estimate the price of unsold shares, but how can the Post attribute gains to Bain (i.e., carry from unsold shares) that it isn’t also attributing to Bain’s investors (i.e., the value of unsold shares)?

3. It is true that Bain is entitled to $120 million in management and transaction fees related to HCA. It is not true, however, that Bain pockets all of that for itself. Well, at least not in the case of HCA.

Bain officially shares all such fees 50/50 with its investors, after subtracting the equivalent of assumed hourly consulting costs. In most cases, that means that Bain takes all fees and its investors see nothing (a practice of which I disapprove, by the way). But because the HCA deal was so large, Bain actually will be sharing a portion of the $120 million with its investors.

Confused? Ok, imagine that Bain assumes 1,000 consulting hours for a deal at $1,000 per hour. If the deal fees work out to $2 million, then investors see nothing (because their $1 million got eaten up). HCA involved lots more dollars, but didn’t actually involve additional hours in an equal ratio to the additional size. As such, there is something remaining for its investors.

4. The Post completely ignores three dividend recaps completed last year by HCA. Those deals returned approximately $4.35 billion of the $5.3 billion originally invested by Bain, KKR, Merrill Lynch Private Equity and the Frist family. Given that Bain’s contribution works out to just under 19%, that means it already had returned $820 million of its initial $1 billion investment. The IPO proceeds are on top of that, as is the value of remaining HCA shares.

Add It Up

So, with all of that in mind, where are we?

As of this very moment, Bain Capital has generated around $258 off of its $64 million investment. This includes giving them all of the deal fees, even though we know they aren’t getting them (unfortunately, I can’t determine the split). It’s also worth noting that the $76 million in fund management fees are designed to offset salaries, office space and other firm-related overhead.

Bain’s investors, on the other hand, so far have generated $1.84 billion on their $956 million investment.

Now let’s include the value of remaining shares, based on today’s opening $31 price: Bain adds $125 million for a grand total of $410 million. Bain’s investors add $2.09 billion, for a total of $3.93 billion.

Finally, let’s assume that Bain’s investors do ultimately pay the carry. That works out to a revised total of $793 million.

So, Bain ultimately would make a bit less than $1.2 billion on its $64 million investment, while its investors would make a bit more than $3.14 billion on their $956 million investment. That means Bain ultimately receives 27.6% of total proceeds, compared to the original NY Post calculation of 42%.

Obviously a very good deal for Bain, but not quite the highway robbery that the Post made it out to be.

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