Bain Capital late last year unveiled a new fund earmarked for investing in growth-stage and mid-market tech companies.
Bain Capital Tech Opportunities Fund is set to raise $1.1 billion, according to an October report in Buyouts, an affiliate publication of Venture Capital Journal, with the Boston private equity firm committing $100 million.
Managing director Darren Abrahamson, a veteran Bain tech investor, is leading the fund. Buyouts chatted with Abrahamson about the rationale for forming the vehicle, its strategy in a crowded field of tech-focused investors, debut deals and recent hires. We also discussed the impact of the covid-19 pandemic on tech deals and the fund’s activity.
How will the covid-19 pandemic impact tech deal-making?
The speed at which the pandemic hit the market has created a high degree of uncertainty. Customers are scaling back on tech spending for the first time in a long time. The effects are diverse and tech companies will be impacted differently. The shock to the system will force corrections, with some businesses needing to run themselves differently in a tougher macro environment. This will include a requirement to improve capital efficiency.
In the short-term, I think we will have a quieter deal landscape. In the longer-term, there will likely be lower valuations. In addition, as we come out of this downturn, we expect to see some truly high-quality tech companies emerge, rather than just companies that are growing with the rest of the market.
Bain’s tech fund has the luxury of not having a legacy portfolio. That allows us to focus on the offense, getting ahead of trends and helping tech companies adapt operationally to a new reality. We have capital to deploy, so there will be no constraints on us in funding interesting opportunities.
Why was Bain Capital Tech Opportunities Fund launched?
Tech has long been a big part of Bain Capital’s business. It is featured across our global platforms – from private equity and venture capital to credit and public equity. That’s because tech is growing in importance in all asset classes and will have an even bigger influence over the long-term.
Bain’s buyout and VC funds address a range of large-cap and early-stage opportunities, but we perceived a gap in the middle. There was no natural platform for investing in entrepreneur-led mid-market companies responsible for an increasing amount of disruptive innovation.
Bain Capital Tech Opportunities Fund will fill this gap. It will invest broadly, but with the aim of backing a select number of North American growth-stage and mid-market tech companies that we can build and leave in better shape than we found them.
Bain’s history of tech investing gives us a unique perspective on emerging upstarts. The highflyers of tech, like those which have gone public, get a lot of the attention. There are many more companies, however, which don’t fit into this category. They include, for example, companies that previously bootstrapped their growth and need a partner to accelerate expansion. Others may be ex-highflyers which require help adjusting their strategies and doing things differently.
Which tech companies and sectors are of most interest?
The fund will invest in five sub-verticals: application software, infrastructure and security, fintech and payments, healthcare IT, and internet and digital media. Priority was given to them because they reflect Bain’s depth of experience and relationships.
Our plan is to apply Bain’s domain knowledge to sourcing opportunities and themes specific to each sub-vertical. That way we can zero-in on companies poised to emerge from the competitive pack.
Target companies will have traction in large, growing end-markets. We expect most to have revenue of $25 million to $100 million or greater, with good product lines. We will support their ability to develop existing markets, enter new markets, recruit talent, scale sales and marketing, and undertake M&A.
The fund will invest $50 million to $200 million per deal, most often taking control stakes or minority stakes with board seats. We will sometimes invest alongside external investors, usually in growth-oriented investments. As Bain’s origins are cross-platform and there is considerable internal sharing of common themes and ideas, we also expect to leverage opportunities alongside our affiliates.
Bain takes a long-horizon view on opportunities in the sub-verticals. We’re still in the early days of tech penetration of the economy. Over the long-term, and with lower barriers of adoption, there will be major shifts in business models and tech will have an impact in every industry.
How will the fund stand out in an increasingly competitive space?
More investors and more capital have focused on software and tech opportunities of late. This has helped drive rising price multiples, which have contributed significantly to returns. In our view, however, this type of multiple expansion is not sustainable.
Bain has been cautious in its approach to tech investing and doesn’t believe you can bet on multiples going up or staying where they are. The fund will develop a concentrated set of investments in companies we feel we have the right to win due to our differentiated strategy and ability to add value.
Why were debut deals A Cloud Guru and BioCatch good strategic fits?
Our inaugural investment in A Cloud Guru (an online cloud computing training platform) is indicative of the deals the fund intends to do. It aligns with our thematic view of growth in the public cloud. Bain wants to get behind this trend but recognizes there is a huge lack of skills among IT professionals who will be working in a cloud environment.
Bain had several companies on its radar, including A Cloud Guru and Linux Academy, both emerging market leaders. Partnering with A Cloud Guru’s VC investors, we merged them in a double play that has the potential to change the competitive landscape. Bain has a lot of experience with tech M&A deals, so we were key to making this happen and integrating A Cloud Guru and Linux in a single organization.
Our next investment in BioCatch (a behavioral biometrics tech provider) reflects Bain’s interest in the theme of cybersecurity and financial services. The shift to digital banking, and now to untethered and mobile environments, has greatly increased opportunities for online fraud.
We met more than a dozen players before investing in BioCatch, whose platform is a vast improvement on traditional authentication methods. BioCatch is at a point in its lifecycle where it can benefit from a partnership to navigate growth challenges, see around corners, and capitalize on opportunities. The latter include moving beyond financial services into a broader set of verticals, such as retail and the public sector.
Is the fund’s team now fully in place following recent recruitments?
We set out to pool a range of skill sets, experience and relationships in the senior team, in part by drawing on Bain’s own tech DNA and history. My and Philip Meicler’s background was doing control buyouts in the tech, media and telecom vertical with an operational focus, while Dewey Awad was previously working as a tech public-equity and late-stage investor.
We also recognized that there is a lot of talent outside of Bain of value to the strategy. This pretty well describes Scott Kirk (formerly with Technology Crossover Ventures) and Hans Sherman (formerly with Goldman Sachs), whose hires last year brought us key growth-equity capabilities and networks.
The investment team is now largely built out. We expect, however, to add more operational resources as the fund continues to invest.
Action item: Learn more about Bain Capital Tech Opportunities Fund here.
(This story was updated to correct A Cloud Guru’s name.)