Training Grounds: Bain Capital, John Connaughton (EP.395)

25:52Now, we've had to do other things over time. Certainly, the industry has public currency, which serves a different master. What we've tried to do is really accelerate our own principle orientation even further. We've always been the head of the pack in terms of how much money we put in our own deals. And every one of the partners does that. And every one of the employees does that. is they're investing in their deals. But we've actually enhanced that by putting a balance sheet together so that we're investing behind all of our businesses. And as a partner, you get to participate in all of the upside from our investments.

26:25And that's actually aligned with our LPs as opposed to something that's in conflict if you have a public security. What are the mechanisms of how that works? We raise a balance sheet, which is long -term capital. It's very low cost. We generate a return that is substantially ahead of that. So think about low rates of 19, 20, and 21, where we raised the capital, and then think about our average returns being 20 to 25%. And so if we invest that balance sheet, as we expect to over the next 10 years, the compounded benefit of that accumulation goes back to the partnership. So it's a very aligning set of rewards associated with just the fact that we're principal investors and produce these terrific performance outcomes.

27:09So inevitably in a firm of your scale, you're going to have a natural churn of some of the people on the team at all levels. What have you learned over the years of the folks that leave? Look, we've all been through the cycles of the dot -com and the hedge funds. And then more recently, the growth equity funds, 19 to 21, where the ability to get there faster, get there quicker, and it may not work out, but if you do, it turns out to be a big payoff. I think that's always out there in every cycle that is out there. And so I think that's where I think some of the arcs that I talked about, the arc of the partnership, the arc of development, the arc of the rewards, including the balance sheet, the arc of the reward system, which isn't just eat what you kill.

27:56Sometimes that is something you need to be patient about. I think our economics are very long dated. My wife was very upset when I told her that we're going to put every dollar back into investing and we're not going to buy a house. We're not going to put a down payment on it. She won that eventually, but we're trying to be investment rich for the long term in our reward system. And I think that leads to a desire for our system to really reward patience and continuity. Look, by the way, it's interesting to see that in 2024 because some of those very people who wanted to see that attractive time give them quick rewards are now coming back to us.

28:30It's funny, we usually assemble a statistic. We have had 48 leaders of our businesses who have come from a different part of the firm or have come back to the firm. And 20 % of them have come back to the firm to lead businesses after they've left. So the nature of how we've created career opportunities here, I think, is pretty distinct. How do you think about the impact on culture of bringing someone back who left in an instance to chase a faster payoff? I have no problem with that. Every person who I've left who I thought was very talented, I've said, you always have a place to come back to, honestly.

29:05It's funny. One of my favorite stories was Adam Koppel, who leads our life sciences business, who I'd worked with for 15 years, public investor. He was an oncologist. He was an MBA, great investor in a public market, but he loved private markets. And he's like, I want to do a life sciences fund. And we just come out of the GFC. I said, we can't do a fund right now. We need to focus. And so he decided He wanted to go try to become the CEO of Biogen. And I said, Adam, you're going to be back here in three or four years. And lo and behold, after a couple of years, being in the corporate world was not as attractive to him as coming back and founding the fund.

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30:30Learn more at srsaquium .com. That's S -R -S -A -C -Q -U -I -O -M .com. And now, back to the show. So you've stayed private all along. As you mentioned, a bunch of your peers have gone public. What have you seen as some of the internal debate about whether or not to take being capital public? So we have to debate whether our premise around how we think about those issues is correct. For instance, the ability to start new businesses. I've heard that as something that is enabled by being public. Retaining and attracting people. I think brand as it relates to capital raising. balance sheet as it relates to having capital to do things more flexibly.

31:17All these things have been elements of what I've heard, at least, are reasons to go public. I think as an irony to all that, I think our ability to have a balance sheet, I think, is far more attractive because we've raised it incredibly low cost capital long -term, whereas I think equities are very volatile. So the cost of capital is not always there when you need it. I think that in terms of attracting and retaining people. I think people who come to a firm where we have 100 % of our economics to invest in our people and our partnership versus having 50 % of it gone forever, I think that's fundamentally more attractive.

31:54Starting businesses, we've started eight new businesses since 2015. And it's all with our people. And I think the opportunity to do that, not by having a brand and capital, but by having people who have decided they really wanted to really pursue an opportunity here at the firm, I think that's a huge advantage for us. I look at all these sort of things that are intended to be advantages, and yet today, I don't think they've in any way precluded our ability to grow and expand and really attract people. And so I think that so far has persisted. I look at the analog of a lot of the private partnerships that used to be on Wall Street that didn't require a lot of capital or being a bank.

32:33And I think that analog of being a high -performing, really exciting partnership that has stewardship over time is one that we think exists in the alternative asset industry. How would you describe the resulting culture from all of those decisions over the years? First of all, you have to develop a lot of trust -based relationships with people that you're going to be in this partnership with for a very long time. Some of my closest personal friends and mentors and mentees are people who I've lived with for decades. And the culture of that, almost like a big family office in a sense, even our alumni, we had our 40th in March and we brought back 40 of our alumni partners, people I've known for decades.

33:12And just the relationships that have existed for that group for that long, I think it's pretty unique. And I think that exists in the act of people today. I think people really understand that collaboration is the core to Bain Capital's distinctive advantage. And when we get together as a vertical or if we get together as a capital markets team or we get together in a business unit across geographies, I think just the energy that comes from that teamwork, I think, is definitely different than I think most other firms. As you look at some of the leaders of the firm that have started younger and worked their way up and been working alongside you for a long time, what are some of the characteristics of the people that have been incredibly successful inside of bank capital?

33:55When you're trying to develop a track record of success, taking on the internal assignment or jumping on a plane to go visit a geography because you have domain expertise, but you're not actually perhaps paid in that carry pool. All of these elements that I see becoming dysfunctional in other large global complex firms, we don't see that in our most successful long -term partners. They jump on a plane. They understand what's paying it forward to get paid back. And they understand that's part of our culture. And I think that ethos is a big one. I think the second one is that you cannot be successful at the firm unless you have terrific upward feedback and are able to manage a team.

34:34And we measure that every deal. We recognize that as a core principle of one's success is ability to manage a team and get terrific feedback. And I think we also see people who are committed to that development over time and have people who have worked in their lanes that become superstars. A lot of times people, they just aren't trying to develop the next set of generation. They're just trying to work transactionally. And I think that doesn't work in our culture. So alongside that need to be able to work collaboratively, run a team, how would you describe the investment DNA of paying capital?

35:07Because our model is so driven by the performance revenues of co -investment and carry and the balance sheet, and because the only way, at least in our view, one generates that set of outcomes that really delivers the promise of those returns is you got to have an impact. You have to do something different with the business. And so the first question we always ask ourselves is, who are we and why are we here? Why are we going to be able to buy a business, oftentimes at the highest price, and yet deliver a better return than anybody else that's looking at it? And the only reason you can do that is to create some form of inflection, some form of strategic repositioning, some form of asymmetric upside in the operating outcomes, some M &A.

35:54And so everything we do is to say, okay, we're going to buy a business based on what was presented by the seller. But if we decide that what they presented is what we underwrote, we're probably not going to win the bid. It has to be some other impact or repositioning that gets us to that outcome. And then the only way it makes it work is if we actually deliver on that through the muscle of our own team. What's the DNA? We're trying to find asymmetric upside, 15 to 20 shots on goal where we can not just generate a good return. And it may not be 25 times like it was in the beginning. It may not be 10 times like it was 20 years ago, but it can be three to five and sometimes 10, by the way.

36:31But that idea of slugging percentage, of not just being a firm that accepts a modest to good return, but actually a good to exceptional return, and then trying to do that as high as the number of times you can in a fund, that's the DNA. We talk about commitment to lasting impact as our purpose, but a lot of that has to do with the idea of just making that inflection and building that greater business and getting the outcome of the return that results from that. As you look back over the years, somewhere along the way, you run into some challenging times. As you look back, what were some of those most challenging times and the most important things that happened for the firm to get through it?

37:08I think the GFC is really an important one because we were all riding a very attractive tailwind. We were also riding a very attractive development in our business model. There was like the top six firms and they all grew very fast and they all had different strategies, although a lot of people thought we were the same. But at the same time, we all were very active from 2005 to 2007. And that was, as they called it, the golden age of buyouts, which turned out to be anything but. And we did a lot of reflection at the time because we thought we could power through with our own operating capabilities to drive outcomes independent of the macro environment that could ever be considered.

37:49And so we looked at cycles in the past and we thought we could live through cycles. We would operate through them and still great returns. But the GFC was a bit different. That was the biblical recession that none of us had ever seen before. And so for us, I think we learned a lot in the sense that macro and cycles are to be things that you can be humbled by very quickly. And to scale into that, many of us invested very quickly in the 05 to 07 period. And we all basically correlated to the same return. And out of that came, I think, a lot of soul searching for firms about how are they going to create even more value?

38:27What are they going to scale? How are they going to scale? What are you going to invest behind to create your own alpha? And then for us, I think it really reinforced the view that we don't want to just be the biggest. We certainly don't want to be concentrated in a couple of years. We have to be much more focused on sort of the macro elements of what can drive outcomes in investment decisions. but fundamentally we also understood that we had some pretty darn good operating capabilities. So we bought almost all cyclical businesses in 06 and 07. And part of the reason we did that is because we thought that was the only way to get a good value because we could live through a cycle, buy something that people wouldn't want to buy in 06 and 07, and then come out the other side and time value of money of cash flows, but the exit would be still really good.

39:10We were completely wrong, at least in the first couple of years. But the good news is we operated, we had 250 people, two thirds of those people were working inside the companies and we call it getting across the icy river. We got across the icy river, which was probably in some ways we'll never get rewarded for it, but it was probably one of our finest moments because we took a fund that was marked down to 0 .65 and ultimately made over two times our money on that fund and with all cyclical businesses. So we learned a lot, but we also made the right strategic choices about how we wanted to grow from there.

39:42As you look back, what are some of the biggest challenges you feel you've successfully overcome as a business? Partnership has a double -edged sword. Partnership implies collaboration. Partnership implies consensus. Consensus can be a terrific thing to vet outcomes and get to a better answer. Sometimes consensus can yield to lowest common denominator and perhaps less nimble decision making. And so when we got to a size around the GFC time period, working too much in collaboration committee structures and consensus -driven leadership committees, I think those things were recognized as not healthy for the business.

40:24And so a lot of what we did coming out of the GFC is to create more alignment around sets of accountabilities among individuals or maybe a couple individuals and empowerment as well of certain individuals to drive more decision -making, more accountability for a more nimble partnership. And that wasn't easy. We started out as 18 after MIT or 18 or 20, and we had that governance model I described, but then over time, we're 180, we have 200 billion of assets, we have 13 strategies. The ability to empower people inside that structure was an important step in having not a committee running the firm, but a couple of co -managing partners, having somebody run private equity as opposed to a committee, all these things that sometimes have that set of trade -offs.

41:09I think we did a lot of work to overcome and it's been terrific. And it's actually created a flatter structure in some ways because people feel more empowered. It's not hierarchical. It's actually giving people real responsibility. How have you thought about the increase in competition over the years? In the early years, the bank capital model, that consulting -driven operational improvement may have been one of the few important players doing it. And now you have a lot of everything. First of all, I do laugh a little bit because there is this check -the -box strategy now for if you're in private equity, which is you have to be strong in your vertical, you have to be global, you have to have value creation, you have to specialists.

41:47I think there's a difference between having those things and being able to operate those things successfully. And I think that The one thing, again, it comes back to the culture that we've done really well is one is integrating those elements of the business. So, yes, it's gotten a lot more professional at value creation and all the different specialists in talent and IT go to market. All these things have gotten way more sophisticated and verticals are far more deep than they've ever been in terms of what you need to know about a sub vertical, let alone a vertical. and being deep in a geography, 100 people in Japan.

42:24These are all things that are table stakes to be really successful is that depth that I'm describing. But then how do you bring it together? If you're doing an industrial deal, our ability to take 40 years of experience doing industrial deals, 40 years of value creation efforts and getting better and better at them every year in our value creation capabilities. And then having that team that does the delivery of outcomes partner with the people that are underwriting the deal and even the portfolio team being part of the underwriting team, that integration is core to what I think makes us different.

42:58It is not a bunch of silos where people have their own roles. We're one team with different types of capabilities to get integrated. In the beginning, it was one person. The person did the deal, they underwrote it. Sometimes they went in to manage it, but now we're trying to recreate that synthesis through deep capabilities, but then integrating it into a team that actually operates in a very different way than our peer set that might just use an in -house consulting firm. And then on top of that, every year we have some form of offsite where we talk about the next five ways we're going to get better.

43:27So this notion of continuous improvement and just not sitting still, it's got to be a core to somebody being successful in our industry. And we actually have vested in over 500 companies. And so that accumulated experience makes a difference. So you had your first, let's call it, event of succession 25 years ago when Mitt left. And now you and your partners that have been around the firm for 25, 30 years over the next, let's just say 25 or 30 years, will probably be moving on as well. How have you thought about continuing to perpetuate the strength that you've had at Bain Capital into another generation of leaders?

44:02I think you're right in saying it really started with the mid -succession, but I think we've had it in a lot of places, whether it be when Asia and Paul Edgerly left and we had to create succession in Asia, or whether it be Dwight Poehler in Europe or Steve Barnes in North America. So we've had this continuous process of trying to both identify people who have that interest and train them and develop them to be not just investors or portfolio team members, but also try to be leaders. And we don't do it in a disruptive way. I think they earn it through being empowered as taking on roles as part of being either part of people leadership or the investment committee, or they end up taking on some form of leadership in addition to their investment or impact role.

44:48And over time, I think we've had this premise that you need to add value in the investment business, but also be able to make an impact internally through leadership. And so I think that's been the secret of how you identify those folks. The challenge, of course, is that people love to do investments. They love to make an impact. And so you need to create a structure that gives them the ability to do both, but not distract them from doing deals. Even I, who have probably had the most internal responsibilities over the last 10 years, I'm still highly engaged in our investment committee process.

45:22When I first took on the role of global head of private equity, I was spending 75 % of mine doing deals. We are an industry of practitioners who also need to take leadership roles. And I think that type of credibility of having people who have been doing deals, making an impact in companies, and then putting them in leadership, that's been part of how we've grown our firm and create great leadership. How much of that selection of leadership is nature versus nurture? There are incredibly successful dealmakers and portfolio folks that would not be great leaders or don't want to be. And so I think that's a common mistake that firms make is they put their best dealmakers who don't either have the interest or capabilities as leaders, and that's become the problem.

46:01So it does require both. You have to have people who can have the interest, but also the capabilities to do both. As you look out over the next 5, 10, or 40 years of being capital, what do you see as where the business and the industry heads? Won't surprise you. I'm a big believer in private capital. I think unlike some others who think private equity has begun to mature, I don't have that view. I start off the very fundamental premise of the principal orientation of having a line interest in creating equity upside through governance, long -term orientation, and ultimately today, big transformational operating change.

46:41There's no shortage of need for that in lots of forms of corporate conglomerates. A lot of what gets done in those are highly inefficient and effective in a way that private equity is just the opposite, very effective in what we do. And so I think we're going to get bigger. I think we're going to get even more highly penetrated into the equity markets. I think it's a better model for driving value for equity and investment returns. And so I think we still have a long way to go there. You saw that a little bit in some of the shrinking of the public market during the latter part of the hypercycle of 19 to 21.

47:16But I think over time, put aside, that's a momentum play. I think you're going to see forms of private capital with a longer term orientation with skills to manage those business in a better way in this private equity model, I think that will persist and grow. And then as it relates to the other parts of the alt asset space, there's even more opportunity to be more professionally managed in the fragmented real estate industry. Infrastructure is just starting, and there's a lot of value that very sophisticated global players who have capabilities can bring. Certainly in the case of credit, where I think the credit market dislocation coming out of the banking regulation and the GFC, I think has created a real understanding that the private credit platforms are really the part of the future as opposed to something that people would say today has just come along and it's cyclical.

48:07I do think that's a secular trend. What do you think will define the winners and losers in that landscape? It's 100 % people. Look, I do think the all asset space, there's a long time between when the active management public space went from being a really people -driven business to becoming a more distribution business and more commoditized. I think in the same way, but way earlier and way, way harder, the private space is definitely about the talent to the people that you can attract and retain. And so from our standpoint, that's where the prize of how you structure yourself, how you create a culture, and how do you make it exciting for people to want to come to work in this industry, which by the way, creates a bigger pool of people coming into the industry than I think would have come in 20 years ago.

48:49And so all those elements, I think, still are critically important. As you look back, what do you see as some of the greatest successes and greatest challenges you've had over this time at Bain Capital? When people go back and think about the ability for the world and the US economies in certain countries to become even more fundamentally more productive, fundamentally more successful, I think the role of having principle -oriented private capital be at the table to drive outcomes. I think that's a great story. And I think the fact that it started out as barbarians at the gate in financial engineering is such a misplaced metaphor for what we do that I think I really do look back at our industry, not just us, and just say, wow, this is a pretty cool thing.

49:35That doesn't happen in the public markets. I think the other piece is just, I think, the people and careers and the ability to drive some of the career opportunities, but also the career development of people I've worked with is very much a success. And I suspect that we've talked to Mitt Romney or Josh Beckenstein or Paul Edgerly or Mark Nunnally or Steve Pagliuca, Steve Barnes, all these people that are my mentors. They would say the same thing is the people. I think the failures, look, we're 40 years in, the narrative for our industry is is still pretty negative. It's not that far away from the barbarians at the gate stereotype that we've been living with from the start.

50:13And so I think that we need to turn that around. And I think there's hopefully a way to do that since we're now more in the mainstream. And I think shedding light and transparency, I think will set us free because I think the good things we're doing is amazing as an industry. And I think the great things that we're doing relative to building businesses is something that should be part of the success, not the failure of where the narrative is. What do you see as some of the most important takeaways you have from this journey for you? One of the most important ones is that this principle of how to drive an outcome by building a business or changing a business or building a management team or developing careers, all these things that are transformative.

50:57There are things that you're taking something and you're changing it to something else is just a really cool thing to be involved with as a person or as a firm or with a set of people who you might attract to the firm. And so what I love about, I used to call this business summer camp when I first got here, because you get to work on a little strategy, a little operating efficiency, work on the board level, work with management teams, do diligence. And so that business summer camp metaphor, if you will, is a great playground to that say, what are you going to do with that? What are you going to do with those sets of activities?

51:31And I think the ability to do those activities in a way to build an enterprise and to build companies, that's a really interesting career choice, a way to attract people, and then a way to create a great firm. The hallway chatter of the summer camp is actually pretty much the same in that people are really getting jazzed about making that impact. And I think that's a key takeaway. Is it the same in the rest of the industry? I think it is. I think people really believe that they're helping businesses and building better industries. And my excitement for the industry, therefore, is pretty high. As you've looked back and celebrating 40 years of Bain Capital, how have you thought about what the legacy is of this business?

52:11The ability to have entered this business, grown this business, and then ultimately create a very different model for large -scale players, a pretty interesting legacy for the founders and for all those that helped build this business. because our ability to be a partnership at scale, our ability to be the largest investor in our funds, our ability to generate consistent, differentiated thousand basis points of premium over our public equity return reference points, our ability to keep people for 25, 30, 35 years, our ability to make an impact in communities through the terrific ability to work with our companies, work with our teams and all the 23 offices we have.

52:58All these things are focused on making an impact and in different ways. So that legacy was a pretty interesting one versus deriative of our industry, which is about a bunch of financial engineers just gathering assets. That's not something that's interesting to us at all. Well, JC, I want to thank you so much for sharing this incredible story of 40 years of success at being capital. Hopefully we'll look forward to the 80th celebration 40 years from now. Thanks for listening to the show. To learn more, hop on our website at capitalallocators .com, where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more.

53:45Have a good one and see you next time. M M M M M Thank you.