“He did a pretty good job connecting the dots.”
That’s what a source close to Bain Capital tells me about David Toll, who today reported that the Boston-based firm would offer investors a greater share of the profits on its next mega-buyout fund. Bain traditionally charges a 2% annual management fee and 30% carried interest, both of which are higher than the industry standard. Toll writes:
One adviser to several state pension plans said he heard “from various sources” that when the firm returns to market with its eleventh core fund, perhaps in 2012, it will offer investors a 20 percent carried interest. “Bain didn’t want to be differentiated in terms of having worse terms than everyone,” said the adviser, who previously declined to invest with Bain Capital but now would consider it.
To be clear, Bain has not yet talked to investors about an eleventh fund. Its $11.5 billion tenth fund is only 51% committed, which means the firm shouldn’t need new capital until 2013. But it has told them to expect books next month on its second Asia fund, which will have three major differences from its first Asia fund:
- It is targeting $2 billion, compared to the $1 billion raised in 2007.
- It will include India investments. Bain didn’t even have a team on the ground in India when the first Asia fund was raised, so its three Indian portfolio companies sit in its general fund.
- It will offer investors a choice of fee structures, as first reported last month by Dow Jones. One option is a 2% management fee and a 20% carried interest. The other is a 1% management fee and a 30% carried interest. Private equity firms don’t typically use multiple-choice fee models, so this really is borrowing a page from the hedge fund world.
The dots Toll successfully connected were between the new Asia fund and the eventual general fund. Bain believes that once it offers its investors this sort of choice in Asia, it will be practically impossible to insist on 2/30 the next go-around. This is particularly true for the new investors Bain hopes to lure for Asia, including certain pension funds that simply will not commit with a 30% carried interest (usually more for PR reasons than investment mandates).
“That next fund is still at least 18 months off,” my source says, “but I can’t see how you can bring fees down closer to industry standard and then raise them again… no matter how high your gross or net returns.”