Bain Capital is not just dipping its toes in real estate.
By absorbing Harvard Management Company’s direct real estate platform, the Boston-based global investment firm is diving into the asset class with $6.5 billion in gross asset value. Led by Dan Cummings since 2009, HMC’s 22-person real estate team has invested $3.4 billion of equity and built a track record as one of the top-performing asset classes for the $36 billion endowment. As of February 1, the platform will form the foundation for Bain’s official entry into property investing.
Though Bain enters the real estate world later than most of its peers, Cummings and Bain co-managing partner Jonathan Lavine are optimistic about the firm’s long-term outlook in the asset class. In a conversation with PERE last month, each highlights Bain Real Estate’s ambitions and the myriad ways that the new business and the overall company complement one another.
“This is a business we plan on being in for the long haul,” Lavine said.
Cummings and his team join a firm with a long history in other alternative asset classes. Founded in 1984 by Mitt Romney, T Coleman Andrews III and Eric Kriss to invest in companies and apply Bain’s consulting techniques to improve operations, the privately-held firm’s business lines now include private equity, credit, public equity, venture, impact investing and life sciences, all areas where Lavine anticipates cross-asset investment opportunities with its new real estate platform. The firm ranked eleventh on sister publication Private Equity International’s 2017 list of the largest private equity managers, with about $85 billion in assets.
Bain first raised a $37 million fund in December 1984 and closed its latest North America private equity fund, Bain Capital Fund XII, on $9.4 billion in September 2017. In its 34 years of operations, the firm’s investments have included those in founder-led businesses, where, early on, it reaped a sevenfold return on its 1986 investment in office supply retailer Staples; club deals, such as the $31.6 billion acquisition of Hospital Corporation of America in 2006 with three partners; carve-outs, including last year’s $3.2 billion acquisition of chemical systems company Diversey Care; and consolidations, such as the 2017 merger of PSA and Epic Health Services to form the US’s largest pediatric home healthcare company.
While Bain is new to real estate investing as a standalone platform, the firm has more than a passing familiarity with the asset class from other investments. Bain Capital Credit, for example, has built a sizable non-performing loan business primarily focused on Europe, where the platform had snapped up nine portfolios in Spain, three in the UK, two each in Ireland and Italy and one each in Greece and Portugal, as of September 30. Many of Bain Private Equity’s deals also have real estate components, including in hospitality and retail.
HMC itself knows Bain well: the endowment has invested in both its private equity and credit platforms. In 2006, for example, HMC was one of at least 10 endowments investing in Bain Capital Fund IX, a 2006-vintage, $8 billion private equity vehicle, according to an investor document.
Despite touching the real estate space through its various platforms, Bain previously avoided accessing the property markets directly because the investment strategy did not pass the firm’s three requirements for creating a new business line: internal support from one of its senior managers; fit with existing platforms; and willingness from the firm’s partners to co-invest in the opportunity.
“If you look at the expansion of our firm, all our business units fulfilled those criteria,” Lavine said. “Over the last 20 years, we looked at numerous opportunities. One of the great hallmarks of Bain Capital is that as a private firm, we’re not in a rush. As disciplined investors, we were patient and waited for the right opportunity to come along.”
Six months ago, Cummings was introduced to Bain’s co-managing partners, Lavine and John Connaughton. At the time, the HMC executive was searching for a home for his real estate platform in a planned spinout from the endowment. While Cummings evaluated options, including going it alone, Bain seemed the best fit in light of its experiences, infrastructure and limited partner relationships, among other benefits, he said.
The fit worked both ways.
When the Bain managing partners met Cummings, “We said, ‘wow, we’ve found a leader who speaks our language, who has an incredibly strong track record, who takes a thematic, industry approach that’s not competing to buy office towers on Fifth Avenue,” Lavine said. “If you substituted the words ‘real estate,’ what they are doing sounds a lot like the way we describe our other businesses at Bain Capital.”
HMC’s returns likewise matched Bain’s goals: The fund’s real estate program generated a 13.8 percent return for the fiscal year ended June 30, 2016, above its 9.4 percent benchmark, and direct real estate returned 20.2 percent in that time, according to the most recent data available.
After extensive due diligence, Bain managers felt comfortable that the platform, unlike previous opportunities, uniquely fit its criteria. The partners anticipated that Cummings’ experienced team could benefit from other groups’ knowledge and vice versa, and their strong convictions checked the boxes for internal support and willingness to co-invest.
Though Bain is entering the asset class at what most industry observers speculate is the top of the cycle, Lavine highlights the HMC team’s ability to invest wisely through cycles and notes that the team would enter any downturn with capital to take advantage of distressed opportunities.
Ready to execute
At its outset, Bain Real Estate appears to have one of the most flexible mandates in private equity real estate. When asked in what specific sandboxes the team could play – asset-level acquisitions, real estate debt, portfolio buys, secondaries, international real estate – Cummings answered, “we expect to evaluate a number of different types of opportunities over the long term,” but did not rule any out.
“If you substituted the words ‘real estate,’ what they are doing sounds a lot like the way we describe our other businesses at Bain Capital.”
– Jonathan Lavine
But the team’s immediate task is managing Harvard’s direct real estate portfolio, which comprised about 167 properties as of September 30. Even under a new umbrella, Cummings said, “I don’t anticipate any significant change in how we approach the market.”
That investment strategy focuses on small to mid-size acquisitions with repositioning potential. With an eye on demographic trends, the team’s thematic focuses include senior housing, self-storage and workforce housing. HMC’s most recent publicly disclosed real estate transaction was the December sale of its majority stake in a 12-property multifamily portfolio in New York to Blackstone for $243.6 million, according to data provider Real Capital Analytics.
Apart from managing HMC’s real estate holdings, Cummings is also busy mapping the future of Bain Real Estate: how to manage third-party capital, besides that of HMC, where to deploy existing and future capital and how to link with Bain’s credit and private equity platforms.
“We have the capital that we’re managing on behalf of Harvard available now, so if we find an attractive real estate opportunity, we’ll be ready to execute on it,” Lavine said.
But Lavine at least gave an indication of Bain’s own capital commitments to any funds materializing. “At Bain Capital, we’re different from other firms in that we’re very large co-investors in all of our asset classes, and we expect to be a large co-investor in real estate,” he said.
Bain’s limited partners are eager to access real estate investing through the firm, Lavine said. With more than 1,000 investors across the firm’s platforms, Bain counts heavyweights such as the New Zealand Superannuation Fund, the California State Teachers’ Retirement System and the Canada Pension Plan Investment Board among its limited partners, some of which are also the biggest private real estate investors globally. HMC’s Ivy League peers are also longtime Bain investors: the endowments for Princeton University, Dartmouth College, Columbia University, the University of Pennsylvania and Yale University have committed to various products, according to PEI data.
Bain’s investors reacted positively to the firm entering real estate, Lavine said. “Our LPs seemed to like the idea a lot, not just that this is a new way they can access Bain Capital’s investment approach, but with the way we chose to go about it.”
No PERE interview would be complete without asking whether there is a plan for a dedicated real estate fund. Lavine and Cummings declined to comment on specifics beyond restating the firm’s desire to add third-party capital “sooner rather than later,” Cummings said.
Both the firm and its investors anticipate cross-platform opportunities to harness the real estate team’s background and footprint, with investments from Europe to China, and Bain’s institutional expertise. Potential areas of overlap include life sciences, a thematic focus for the HMC team. Cummings, for example, could help Bain-affiliated life science companies evaluate their real estate options, while he could benefit from better understanding tenant viability as a landlord with proximity to the private equity team’s work.
As for expanding the real estate team, Bain – which has 15 offices and over 950 employees – has moved around some staff to accommodate new platform needs when building previous businesses, and expects to do likewise with real estate. “We clearly expect to add to our already-strong team,” Cummings says. Lavine adds: “As with everything at Bain Capital, we’ll staff this with as many people as it possibly needs, plus three. Nobody has ever said we’re understaffed.”
Continuing to extol the firm’s virtues, the pair say few firms can launch a new platform with immediate cross-asset investment opportunities, billions in capital from a name-brand investor and a seasoned team boasting an enviable track record. “Although this is unusual in that it’s all people coming from the outside, this combination has felt as good a fit as I’ve come across in my 25 years with Bain Capital,” Lavine said.
A giant in other alternatives, Bain is positioning itself as a formidable real estate player too. The PERE 50 ranking, which measures private equity real estate capital raised over five years, is one yardstick to measure its success. Once Bain adds third-party management to its real estate business it will expect to rise up that ranking, and other sector benchmarks besides.