Bain Capital is finally going public. To be more specific, a section of the well-known investment firm called Bain Capital Specialty Finance Inc. (NYSE:BCSF) has filed for a $100 million IPO under the banner of BCSF according to Reuters. The IPO amount is a placeholder value used to calculate filing fees and we can expect BCSF to enlarge the IPO size eventually. BofA Merrill Lynch, Goldman Sachs, Morgan Stanley and Citigroup are among the underwriters for the IPO.
There is not a lot we know about this IPO, especially as we do not know the IPO size nor its resulting valuation. We cannot thus draw a firm conclusion about whether investors should be interested, but there are some troubling signs as we look through the initial numbers and what BCSF is trying to do. Investors should listen carefully during the roadshow, but skepticism should be the initial order of the day.
A New Business
Bain Capital is a well-known and large investment firm, but the same cannot be said for BCSF. In fact, BCSF states in its S-1 filing that it was founded in October 2015 and commenced investment operations on October 13, 2016. Furthermore, BCSF’s website states that it has just “25 dedicated professionals around the world that exclusively focus on middle-market investments.”
Bain defines middle-market investments as companies “between $10.0 million and $150.0 million in annual earnings before interest, taxes, depreciation and amortization.” The company aims to retain effective voting control through its investment, with a heavy emphasis on high tech, healthcare and pharmaceuticals, and business services. None of these sectors make up more than 15 percent of BCSF’s portfolio, which is good from a diversification standpoint.
It should be noted that middle market lending has become a hotspot of capital and ideas recently, as Reuters reported in August that $35 billion had been raised for middle market strategies. Businesses within that $10 million to $150 million range cannot receive either large bank nor small business loans, leaving them with a credit crunch. The market opportunity is there especially in this thriving economy, and BCSF’s close connection with Bain Capital as well as its wide range of investments means that it is in a good shape to profit.
Given its connection to Bain Capital as well as its interest in a growing market, it is little surprise to see that BCSF has rapid initial growth. BCSF reported a total investment income of $38.9 million in the first six months of 2018, compared to $6.8 million in the same timeframe in 2017. Furthermore, BCSF’s cash flow increased by $74.2 million in 2017, followed by remaining at neutral in the subsequent six months.
But there are a few problems to note. First, BCSF is a young business, which means that there are not many data points to establish a continued track record of growth. The company also has $478.6 million in total liabilities compared to $148 million cash on hand. BCSF does have $1.2 billion in total assets, but the company indicates that it plans to use the raised IPO funds to pay off debt. It is also likely that some of that debt is Bain Capital Credit sloughing off some of its burdens onto its subsidiary.
And while there are reasons to be excited of the market opportunity of middle market lending, we should remember that economists and analysts have begun to whisper about growing risk in corporate debt. If corporate debt destabilizes our strong economy like some fear it will, BCSF would be incredibly hard hit given the nature of its investments.
Not Enough Data
More aggressive investors may be intrigued by BCSF’s high growth, its connection to Bain Capital, and its potential market opportunity in middle market lending. But we should not forget that this is a company with minimal operating history and its connection to Bain Capital is not necessarily positive. Many of BCSF’s personnel will still have responsibilities with Bain Capital, limiting their potential effectiveness and creating potential conflicts of interest.
As noted above, investors must wait until BCSF announces how much they plan to raise and what their valuation will be before determining whether this is a worthwhile investment. But as it stands right now, I suspect that investors should be skeptical about BCSF’s long-term fortunes.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.