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Bain Capital is the world’s largest private private equity firm, boasting $160 billion of assets. Bain is not planning to follow the lead of many other private equity firms that went public earlier in this year like TPG. 

John Connaughton co-manages Bain Capital’s Private Equity global team. CNBC’s Delivering Alpha newsletter invited him to sit down with them exclusively and discuss the headwinds in private equity as well as current dealmaking conditions. He also explained why his company is keeping it private. 

 The following video has been cut for clarity and length. You can see the entire video above.

Leslie Picker: We feel like we’re at this moment in our dealmaking climate. Are you seeing the world through your conversations with different counterparties?

John Connaughton Last year was an incredible year. ’21 is unheard of in so many aspects. While this is nothing new in the industry, it was an unprecedented record. It exceeded all previous records by at least two. We had a $1.2 trillion M&A market for private equity. It’s still interesting that in the first quarter this year it continued to increase, and I believe it was around $330 billion. We’re seeing quite some activity despite the disruptions in the public markets.

Picker: Are you seeing multiples come down, though, as a result of things like rising interest rates, the cost of debt, the cost of equity becoming increasingly expensive? These conversations: How is it shaping up?

Connaughton: In these cases, public markets, they immediately rerate and that’s what we see. We continue to view that opportunity. Despite the fact that sellers are reluctant to trade at lower multiples in every cycle of my involvement, it has been a consistent theme with all cycles I have worked on. So, the value must season to lower. So even the tech sector – which we’ve done a number of transactions this year in tech at much lower multiples – it does take time, because the flow for a while will take some time to get the quality assets to reset to lower values.

Picker: Based on your experience, how much time does that usually take? Are we talking? Are we talking about a few months, six months or a whole year? Or several years with lower valuations

Connaughton: If the volatility continues, people will want to wait to see if the uptick will continue and persist. However, this is a different scenario. This is because I believe we will see increasing rates and inflation in this situation. The re-rating seems to have a more lasting impact. So, it is likely that the public and private markets will wait six to twelve months. The private markets may follow six months later.

Picker: I want to turn to private equity returns because in some cases, in many cases, they’ve usurped other asset classes in recent years, and so therefore, they’ve become a higher concentration of various limited partner portfolios. Is it possible to see LPs pulling back and needing to reduce their exposure to private capital? What does this mean for industry fundraising efforts?

Connaughton: The platform continues to attract a lot of fundraising support. The fact that the investment rate of people was much higher than what they had in their funds over the previous two years or three years does not surprise me. So people started investing in funds in a few years. That’s not healthy for the investors. It isn’t good for their endowments management, foundations or pension fund administration. This is why I believe that the return to fund cycles of three or four years will likely be what happens relative to future investment activity. This means for limited partners that I do not believe you will see the private capital industry returning every year or every two years. They’ll be able to control their final unfunded obligations, which is really what they worry about.

Picker: So, do you think too that the industry has gotten too big? It is possible that this industry has become too big.

Connaughton: It won’t surprise you that I do believe that the industry will grow, and I think,  grow significantly from here still. It’s unlikely that we will see $1.2 trillion per year. I do think we came into ’21, with about a $500 billion to $600 billion pace of activity for the industry – and by the way, that’s much higher than it was 10 years before that. This is due to global expansion. Because of the equity checks for larger companies, I believe that this is due to increased access for private equity. Companies which were not touched twenty years ago are now more affordable. We are much more likely than ever to participate in transactions that will go public earlier in previous cycles. And now, we can actually take advantage of firms that want to go public. So, while I believe that private equity has increased its penetration in the equity markets across the globe and is now more widespread, it still has some way to go. 

Picker: You brought up a good point, which is the idea of companies going public. Now, I’d like to turn the tables on you and question about your personal portfolio. Although IPOs had some difficulties over the past decade, they have seen a steady rise in popularity. Overall, it’s been a good run. This is not the case for 2022. Some of the advantages you get on the buy side might not apply to you on the sell side, as you are looking to make certain sales and exit investments. What do you think about this? Do you find yourself in a “hunker down” mode, or do your current circumstances make you more opportunistic?

Connaughton: People tend to think that our industry is short-term and is geared towards one particular credit or capital market cycle. One of the strengths of our industry, I believe is that we think long-term about exit optionity and know that there will be cycles. Bombardier Recreational Products is a company that we own. We’ve been in business for over 20 years and we continue to be shareholders. This inflection has allowed us to increase equity in the company throughout that time. For us, exits are not about can we leave next year or in two years. Instead, we look at a period of time where there may be an opportunity. If we need to keep a company, our underwriting considers the possibility of generating returns even if it is for a long period. It doesn’t really matter what happens to the markets, if that is done.

Picker: According to my understanding, you are one of the most prominent private private equity companies. Many of your peers went public. It makes no sense to remain anonymous. Are you considering an IPO? Are you hesitant about putting your money up for an IPO?

Connaughton: We get asked this question a lot, due to our sheer size, but also our scope. There are 12 of our businesses and they’re located in all 50 states. It is a fundamental question that I want to address: Does it give our company a competitive edge or, more important, does it disadvantage us if we are not public? As we looked at that, it has allowed us to open as many new businesses as we like, as well as a large balance sheet. We have doubled our total AUM in just the last four-five years. Because we do not give our economics away to the public, we believe that private ownership has a town advantage. This money is fully kept within the company. Things could change, but they have so far. Goldman had been privately owned for quite some time prior to going public, which was in the wake of many other private equity firms becoming public. It could be different, I believe, but right now we feel it is a competitive advantage for a large-scale private equity company that manages many asset classes and does so using our own resources as well as our capital. While we will continue to monitor the situation, at this time, we don’t plan on going public.