Harvard Case - Altoona State Investment Board & Bain Capital Fund XI
"Altoona State Investment Board & Bain Capital Fund XI" Harvard business case study is written by Josh Lerner, Ted Berk. It deals with the challenges in the field of Finance. The case study is 14 page(s) long and it was first published on : Aug 7, 2017
At Fern Fort University, we recommend the Altoona State Investment Board (ASIB) carefully evaluate Bain Capital Fund XI's proposal, focusing on the potential returns and risk profile of the fund. While the fund offers attractive returns, ASIB must consider its investment mandate and risk tolerance before committing to a significant allocation. We recommend conducting a thorough due diligence process to assess the fund's performance history, investment strategy, and management team. This will allow ASIB to make an informed decision that aligns with its long-term financial goals.
2. Background
The case study revolves around the Altoona State Investment Board (ASIB), a public pension fund responsible for managing the retirement savings of state employees. ASIB is seeking to diversify its investment portfolio and is considering allocating a portion of its assets to Bain Capital Fund XI, a private equity fund managed by Bain Capital. The fund focuses on leveraged buyouts of established companies with potential for growth and improvement.
The main protagonists in the case are:
- ASIB: The decision-making body responsible for allocating the state's pension funds.
- Bain Capital: The private equity firm managing Fund XI and seeking to attract investment from ASIB.
- ASIB Investment Committee: The committee tasked with evaluating the investment opportunity and recommending a decision to the full ASIB board.
3. Analysis of the Case Study
To analyze the case, we utilize a framework combining financial analysis, risk assessment, and strategic considerations:
Financial Analysis:
- Fund Performance: ASIB should analyze Bain Capital's historical performance data, including returns, risk-adjusted returns, and fund performance relative to benchmarks.
- Investment Strategy: Understanding Bain Capital's investment strategy, including target industries, deal size, and exit strategies, is crucial to assessing alignment with ASIB's investment objectives.
- Fee Structure: ASIB needs to carefully evaluate the fees associated with investing in Fund XI, including management fees, carried interest, and potential performance-based fees.
- Financial Modeling: ASIB should build a financial model to project potential returns and risk scenarios for the investment. This model should consider factors like market conditions, macroeconomic trends, and potential exit strategies.
Risk Assessment:
- Private Equity Risk: ASIB must acknowledge the inherent risks associated with private equity investments, including illiquidity, limited transparency, and potential for fund underperformance.
- Market Risk: ASIB should assess the potential impact of broader market fluctuations on the fund's performance and consider hedging strategies to mitigate risk.
- Operational Risk: ASIB should evaluate the operational risks associated with Bain Capital's management team, including experience, track record, and potential conflicts of interest.
Strategic Considerations:
- Investment Mandate: ASIB needs to ensure that the investment aligns with its investment mandate and risk tolerance.
- Diversification: ASIB should consider the impact of the investment on its overall portfolio diversification and potential for exceeding its risk parameters.
- Long-Term Goals: ASIB must assess the potential for the investment to contribute to its long-term financial goals, including providing stable returns for pensioners.
4. Recommendations
ASIB should:
- Conduct a thorough due diligence process: This should include detailed financial analysis of Bain Capital Fund XI's performance, investment strategy, and management team.
- Develop a comprehensive risk assessment: This should cover market risk, operational risk, and the inherent risks associated with private equity investments.
- Build a financial model: This model should project potential returns and risk scenarios, considering various macroeconomic and market conditions.
- Evaluate the investment in the context of ASIB's overall investment portfolio: This includes assessing the impact on diversification, risk tolerance, and alignment with the investment mandate.
- Negotiate favorable terms: ASIB should leverage its position as a large investor to negotiate favorable fees and other terms with Bain Capital.
- Consider a phased investment approach: Instead of committing to a large allocation upfront, ASIB could consider a phased approach, starting with a smaller investment and increasing exposure based on performance and risk assessment.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: ASIB's core competency is managing public pension funds. Investing in private equity aligns with its mission to provide stable returns for state employees.
- External Customers and Internal Clients: The primary external customers are state employees, who rely on ASIB to manage their retirement savings. Internal clients include the ASIB board and staff, who are responsible for making informed investment decisions.
- Competitors: ASIB needs to be aware of the competitive landscape in the private equity market and ensure that its investment decisions are competitive.
- Attractiveness ' Quantitative Measures: The attractiveness of the investment is assessed based on potential return on investment (ROI), risk-adjusted returns, and the fund's ability to contribute to ASIB's long-term financial goals.
- Assumptions: The recommendations are based on the assumption that Bain Capital Fund XI is a well-managed fund with a proven track record and a strong investment strategy.
6. Conclusion
Investing in Bain Capital Fund XI presents a potential opportunity for ASIB to diversify its portfolio and achieve higher returns. However, the decision requires careful consideration of the fund's performance, risk profile, and alignment with ASIB's investment mandate. By conducting thorough due diligence and risk assessment, ASIB can make an informed decision that balances potential returns with risk management and ensures the long-term financial security of its beneficiaries.
7. Discussion
Alternative options include:
- Investing in a different private equity fund: ASIB could explore other private equity funds with different investment strategies and risk profiles.
- Increasing allocation to other asset classes: ASIB could choose to allocate more funds to other asset classes, such as real estate, infrastructure, or emerging markets.
- Maintaining current portfolio allocation: ASIB could choose to maintain its current portfolio allocation and avoid any significant changes.
Risks:
- Underperformance of the fund: The fund may not meet its performance targets, resulting in lower returns for ASIB.
- Market volatility: Market fluctuations could negatively impact the fund's performance.
- Operational risks: Bain Capital's management team may not be able to effectively execute its investment strategy.
Key Assumptions:
- Bain Capital Fund XI is a well-managed fund with a proven track record.
- The private equity market will continue to offer attractive returns.
- ASIB has the capacity to effectively manage the risks associated with private equity investments.
8. Next Steps
- Develop a detailed due diligence plan: This plan should outline the specific steps ASIB will take to evaluate the fund, including financial analysis, risk assessment, and management team evaluation.
- Engage with Bain Capital: ASIB should engage in detailed discussions with Bain Capital to understand their investment strategy, performance history, and fee structure.
- Develop a decision framework: ASIB should develop a clear framework for evaluating the investment opportunity, considering both quantitative and qualitative factors.
- Present the investment proposal to the ASIB board: The investment committee should present its findings and recommendations to the full ASIB board for final approval.
- Implement the investment decision: Once approved, ASIB should implement the investment decision, including allocating funds and monitoring the fund's performance.
This comprehensive approach will enable ASIB to make a well-informed decision that aligns with its investment mandate, risk tolerance, and long-term financial goals.
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Case Description
Considers the decision faced by state pension fund manager Rod Calhoun as he decides whether to invest $200 million in Bain Capital's eleventh global buyout fund: Bain Capital Fund XI. For the fund, Bain was offering its limited partners a choice among three different fee structures: first, a "conventional" fee structure of a 1.5% management fee with 20% carried interest and a 7% preferred rate of return; second, a 1% management fee with 30% carried interest and a 7% preferred rate of return; or third, a 0.5% management fee, 30% carried interest, and a 0% preferred rate of return. Should Calhoun invest in Bain? If he should, which fee structure should Calhoun choose?
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